QUESTION 8 Consider the writing exercise from the Economics Network at the Unive

Question

QUESTION 8

Consider the writing exercise from the Economics Network at the University of Bristol as you prepare to turn in your paper proposal. This task is intended to train you in the basic organization of information. Read the question and determine which response is more coherent and concise.

Question: Give an example of a good that is likely to be inferior in the country that you come from. Explain why you think this good is likely to be inferior.

Student 1:  Baked beans are an example of an inferior good in the UK. As income increases a UK consumer buys less baked beans; the new budget enables the consumer to buy more luxurious goods e.g. organic runner beans, instead. As income decreases, a consumer buys more baked beans because they are more affordable than organic vegetables. The income and substitution effects for this good work in opposite directions; if the price of baked beans increases, price elasticity of demand is negative (we substitute baked beans for other goods) and income elasticity of demand is negative (we buy more baked beans).

Student 2: Baked beans are likely to be an inferior good in the UK. This is because they are very cheap and when people's incomes are low they are likely to consume it as the main part of a meal (e.g. beans on toast). As people's incomes rise however, they are likely to either consume it as a side dish or replace it with fresh vegetables and therefore reduce their consumption.

Student 1:  Baked beans are an example of an inferior good in the UK. As income increases a UK consumer buys less baked beans; the new budget enables the consumer to buy more luxurious goods e.g. organic runner beans, instead. As income decreases, a consumer buys more baked beans because they are more affordable than organic vegetables. The income and substitution effects for this good work in opposite directions; if the price of baked beans increases, price elasticity of demand is negative (we substitute baked beans for other goods) and income elasticity of demand is negative (we buy more baked beans).

Student 2: Baked beans are likely to be an inferior good in the UK. This is because they are very cheap and when people's incomes are low they are likely to consume it as the main part of a meal (e.g. beans on toast). As people's incomes rise however, they are likely to either consume it as a side dish or replace it with fresh vegetables and therefore reduce their consumption.

Explanation / Answer

Statement given by Student 1 is correct and covering the answer of the question.

Reasoning given by Student 2 is wrong.

When income increases, demand for inferior goods will decrease. Consumers who were using inferior goods "trade up" to more higher priced goods because now they can afford it.

So Student 2 is wrong because there is no concept of reducing consumption in this theory.

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