Consider a consumer who consumes only two goods, peas and beans. He has an
income of \(£ 10\), the price of beans is \(20 \mathrm{p}\) per \(\mathrm{kg}(=£
0.2)\) and the price of peas is \(40 \mathrm{p}\) per \(\mathrm{kg}(=£ 0.4)\).
(a) Suppose that the consumer consumes \(30 \mathrm{~kg}\) of beans. Assuming
that the consumer wants to spend all his income, how many \(\mathrm{kg}\) of
peas is he going to consume?
(b) Assume that the price of peas falls from \(40 \mathrm{p}\) to \(20
\mathrm{p}\). Assuming that the consumer still consumes \(30 \mathrm{~kg}\) of
beans, find the new quantity of peas.
(c) After the decrease in the price of peas to \(20 \mathrm{p}\), assume that
the consumer is just as well off as he was in (a) if he has an income of \(£
7.60\). However, with that income and the new price of peas he would have
consumed \(20 \mathrm{~kg}\) of beans. Find the quantity of peas he would have
consumed in this case.
(d) Find the substitution effect on consumption of peas due to the decrease in
the price of peas in \((\mathrm{c})\)
(e) Find the income effect on consumption of peas due to the decrease in
income \(\operatorname{in}(\mathrm{c})\)
