Margaret consumes two goods: wine and caviar. She has well-behaved preferences and her budget is initially $2000. The price of a bottle of wine is $130, and the price of an ounce of caviar is $150. Now suppose Margaret's budget increases to $3000. Does her consumption of caviar increase?

Question

15-02-2025
Engineering

College

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Margaret consumes two goods: wine and caviar. She has well-behaved preferences and her budget is initially $2000. The price of a bottle of wine is $130, and the price of an ounce of caviar is $150. Now suppose Margaret's budget increases to $3000. Does her consumption of caviar increase?

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saishreechandan907 saishreechandan907 · Answer 1 · 2024-08-09T02:08:03-04:00

To determine whether Margaret's consumption of caviar increases when her budget increases to $3000, we need to consider her preferences and the prices of wine and caviar.

Yes, Margaret's consumption of caviar may increase with the increase in her budget from $2000 to $3000.To determine the exact impact on her consumption, we need to consider the relative prices of the two goods and Margaret's preferences. If the price of caviar remains constant at $150 per ounce while her budget increases, she now has more income available to allocate towards caviar. If caviar is a normal good for Margaret (meaning she consumes more of it as her income increases), then it is likely that she will choose to increase her consumption of caviar with the higher budget. However, if caviar is an inferior good for Margaret (meaning she consumes less of it as her income increases), her consumption of caviar may not necessarily increase despite the higher budget.

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