Question

two economists found empirical evidence that when the price of rice decreased in the hunan province of china, local residents consumed less rice than before the price decrease. the study provides a real-world example of a(n)

Answer 1

Decreased consumption of rice in China after a price decrease showcases the income and substitution effects, which are exceptions to the normal law of demand.

Step-by-step explanation:

The empirical evidence found by two economists that shows a decrease in the consumption of rice in Hunan Province, China, after a decrease in its price is a real-world example of the income effect and the substitution effect at play. Normally, the law of demand states that a lower price will lead to a higher quantity demanded. However, this situation shows that there are exceptions to this rule, mainly explained by the income and substitution effects. The income effect occurs when a change in the price of a good alters a consumer's buying power. For example, if rice becomes cheaper, locals may feel their purchasing power has increased and might decide to purchase higher-quality or more varied foods, reducing their intake of rice despite its lower price.

The substitution effect happens when consumers opt for a substitute when a good becomes either more expensive or cheaper - they may, for instance, decide to buy a more expensive alternative to rice that is now relatively more affordable due to an increase in their real income or different consumption preferences.