For $5.99, you can buy two plant-based hamburger patties. Or you can buy two pounds of ground beef and make even more patties. Food industry researchers anticipate price parity in five years.— cnbc.com
Liam’s preferences and constraint
- Figure 1 shows Liam’s preferences for meat burgers and plant-based burgers
- Liam has $30 to spend every month on burgers.
- The price of a meat burger is $0.75 and the price of a plant-based burger is $3.
What is Liam’s real income in terms of burgers?
Liam’s real income is the quantity of burgers that he can afford to buy. His real income in terms of meat burgers is $30 ÷ $0.75, which is 40 meat burgers. His real income in terms of plant-based burgers is $30 ÷ $3, which is 10 plant-based burgers.
How does Liam use information about his real income to draw his budget line?
Figure 2 shows Liam’s budget line, B0. Liam’s budget line intersects the y-axis at Liam’s real income in terms of meat burgers and intersects the x-axis at Liam’s real income in terms of plant-based burgers.
How many meat burgers and how many plant-based burgers does Liam buy?
Figure 3 shows Liam’s best affordable point—the point on his budget line and on the highest attainable indifference curve. Liam buys 20 meat burgers and 5 plant-based burgers on indifference curve I1.
Suppose that in five years, the anticipated price parity occurs. Does Liam change his burger choices?
“Price parity” means the price of a plant-based burger falls to the price of a meat burger, and Figure 4 shows the effect of the burger price parity on Liam’s burger choices. With price parity, his budget line rotates outward to B1. Now his best affordable point is on indifference curve, I4. Liam buys 10 meat burgers and 30 plant-based burgers.
What are Liam’s substitution effect and income effect of the price change?
Figure 5 divides the price effect into a substitution effect and an income effect.
Liam’s substitution effect is the move from point A to point C along indifference curve I1, which is an increase in the quantity of plant-based burgers from 5 to 15 and a decrease in the quantity of meat burgers from 20 to 5.
Liam’s income effect is the move from point C on curve I1 to point B on curve I4, which is an increase in the quantity of plant-based burgers from 15 to 30 and an increase in the quantity of meat burgers from 5 to 10.
Are plant-based burgers a normal good or an inferior good for Liam?
Plant-based burgers are a normal good because when the price falls, Liam’s income effect reinforces his substitution effect.
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