Suppose that macaroni and cheese is an inferior good and the ...

[Pineapplelove6]

Suppose that macaroni and cheese is an inferior good and the price of macaroni and cheese rises. Explain the income and substitution effects of this price change.
 
  What will be an ideal response?

Question 2

Define the short-run industry supply curve. Explain the two factors that can cause the short-run industry supply curve to shift to the right.
 
  What will be an ideal response?

[meganmoser117]

Answer to Question 1

When the price of macaroni and cheese rises, we have less purchasing power than before. If macaroni and cheese is an inferior good, this means that we will consume more of it. This is the income effect. Also, an increase in the price of macaroni and cheese makes it relatively more expensive. Thus, households will shift away from purchasing macaroni and cheese to purchase relatively cheaper goods. This is the substitution effect. Because these two effects work in opposite directions, the outcome (in terms of the quantity of macaroni and cheese demanded) will depend on which effect is larger. While it is theoretically possible, it is unlikely for this income effect to be larger than the substitution effect.

Answer to Question 2

The short-run industry supply curve is the sum of marginal cost curves above AVC of all the firms in the industry. The two factors that can shift the short-run industry supply curve to the right are a decrease in the price of an input and an increase in the number of firms in the industry. It could also be the result of increased plant size for existing firms and improvements in technology.

[Pineapplelove6]

Thank you

[meganmoser117]

No problemo