The Effects of Reforming the Chinese Dual-Track Price System

we demonstrate how an increase in market price can increase the consumption of
X by a type-1 household. As x and p are fixed, an increase in market price raises
the implicit income of the type-1 household. This is depicted as the clockwise
rotation around point A of the budget line from BC to LN. The tangency of an
indifference curve with the new budget line occurs at M, which is the new equi-
librium for the type-1 household. In this case the increase in p causes the type-1
household to consume more (moving from E to M).¹⁴

Fig 4 about here.

3.1 Effects on Price Indices

The market-clearance condition is now

αx¹ [p, y)¹ +(p - p))x)] + (1 - α)x²(p, y)²) = x^s.

¹⁴ Figure 4 represents the case in which the household consumption of the DTP good is less
than the plan-track quantity allocation. When, instead, it consumes more than this allocation,
starting at a point on AC, the price change causes it to shift to a point on AN.

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