Read the The Economist article, "As Prices Go Up, So Does Demand".

(a) Using the examples from class, along with the main finding discussed in this article, please draw a graph that depicts that total effect, income effect, and substitution effect for rice among China's poor. Assume that price of rice rises. Label your graph accordingly.

Note: Please graph rice a long your x-axis.

(b) The author of this Economist article asks if this same effect would be applicable for automobiles amongst the poor in the U.S. What do you think the right answer might be: yes or no? Please explain using economic rationale.

Note: Think about some of the assumptions that must be in place in order for a commodity to be Giffen.

Suppose a large increase in the price of Good 1 precipitated by a change in government policy was matched with a lump-sum grant that offset any lost consumer purchasing power, meaning that a consumer's original consumption bundle would be just affordable after the new prices and grant are accounted for. How would a consumer's welfare change as a result of this policy? Would their overall welfare rise, fall, or stay unchanged?

Note: Assume this consumer has "normal looking" indifference curves.

Answer rating: 100% (QA)

a Here is a graph depicting the income substitution and total effects for rice among Chinas poor whe... View the full answer