What would happen to the market demand curve for
polyester suits, an inferior good, if consumers’
incomes rose?
Larsen E. Pulp, head of Pulp Fiction Publishing Co.,
just got some bad news: The price of paper, the company’s most important input, has increased.
a. On a supply/demand diagram, show what will
happen to the price of Pulp’s output (novels).
b. Explain the resulting substitution and income
effects for a typical Pulp customer. For each effect,
will the customer’s quantity demanded increase or
decrease? Be sure to state any assumptions you
are making.