Essay on Baba

3160 Words Jan 27th, 2016 13 Pages
Answers to the Problems and Applications
1. William Gregg owned a mill in South Carolina. In December 1862, he placed a notice in the Edgehill Advertiser announcing his willingness to exchange cloth for food and other items. Here is an extract: 1 yard of cloth for 1 pound of bacon 2 yards of cloth for 1 pound of butter 4 yards of cloth for 1 pound of wool 8 yards of cloth for 1 bushel of salt
a. What is the relative price of butter in terms of wool?
1 pound of butter exchanged for 2 yards of cloth and 4 yards of cloth exchanged for 1 pound of wool. Hence 1 pound of butter exchanged for 2 yards of cloth and 2 yards of cloth exchanged for 1/2 pound of wool. So the relative price of butter in terms of wool was 1/2 pound of wool per
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When the price rises, people substitute to different foods. For instance, some might substitute home cooked meals for dining at a restaurant. And when the price rises, there is a negative income effect, so people they buy less of food overall and less food with the rising price. On both counts, the higher price of food decreases the quantity of food demanded.
b. Explain how the substitution effect influences food purchases and provide some examples of substitutions that people might make when the price of food rises and other things remain the same.
People substitute in two ways: They substitute cheaper foods for more expensive foods and also substitute diets for food.
c. Explain how the income effect influences food purchases and provide some examples of the income effect that might occur when the price of food rises and other things remain the same.
Food is a normal good so a rise in the price, which decreases people’s real incomes, decreases the quantity of food demanded. In the United States, restaurants suffer as the negative income effect from a higher price of food leads people to cut back their trips to restaurants. In poor countries, people literally eat less when the price of food rises and in extremely poor countries starvation increases.
3. Place the following goods and services into pairs of likely substitutes and into pairs of likely

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