Previously, we have considered agents whose income is fixed independently of pri
ID: 1216513 • Letter: P
Question
Previously, we have considered agents whose income is fixed independently of prices. For this problem, consider instead an agent whose income comes from selling his endowment omega, where omega_1 > 0 and omega_2 > 0. Suppose that originally prices are (p_1, p_2), and the agent demands more of good 1, and then the price of good 1 increases to p'_1 > p_1. Give an example where this price increase makes the agent worse off, and give a second example where this price increase makes the agent better off.Explanation / Answer
Ans
Endowment = w>0, w2>0
Original Price = p1 and p2
Demand = D1>1 Price = p'>p1
According to the question agent remuneration is fixed irrespective of the price and sale of the good, so below two situations may arise which can make the agent worse off or better off. Case1- When agent is worse off- It happen in the case of those good where price elasticity is 0, it is applicable to essential goods where irrespective of the increase in the price people have to buy those items as it is difficult to survive without them also petroleum products like diesel and petrol are also comes under this category, suppose govt have decided to increase the price of the petrol then it is obvious demand will not increase as it is the basic things to run a vehicle so as new vehicles are added on the road day by day, demand will increase only irrespetive of the price in this scenario agent will be a worse position as he can't make profit due to increase in demand his remuneration is fixed. Case 2- When agent is Better off- Some commodities which are highly elastic due to change in price, for example electronic items the moment price is increased their demand used to fall considerably so in this scenarios agent is on a safer side as reduction in demand will not affect his remuneration.
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