Answer to Question #318255 in Microeconomics for khosie

Question

Due to substantial increases in prices in Country A, the real income level of the population in Country A decreases. Show on a diagram how the decrease in the income level in Country A will affect the demand for meat, which is a normal good. Also indicate how the equilibrium price and equilibrium quantity of meat will change in Country A. The direction of any changes should be clearly indicated using arrows. Note that your diagrams should be properly annotated and that marks will be deducted for any missing labels on your diagram.

Answer 1

Increases in commodity prices in a country without corresponding increases in real income result in a fall in real income. In this instance, the cost of goods exceeds the amount of money earned by citizens. Because prices are high, this results in a drop in actual income. Higher costs lead to a shift in consumer behavior, with buyers reducing their consumption of goods and focusing solely on essential or fundamental necessities. Because there are various meat substitutes that are less expensive than meat, the demand for meat will decline.

A drop in real income causes a drop in equilibrium price and quantity. Because there is little real income, the quantity offered will decline along with the demand for the commodities.

This can be illustrated in the figure below;