Asked by Ellen Sypolt on May 21, 2024
Verified
Maude thinks delphiniums and hollyhocks are perfect substitutes, one for one.If delphiniums currently cost $2 per unit and hollyhocks cost $3 per unit and if the price of delphiniums rises to $7 per unit,
A) there will be no change in the demand for hollyhocks.
B) the income effect of the change in demand for delphiniums will be bigger than the substitution effect.
C) 1/5 of the change will be due to the income effect.
D) the entire change in demand for delphiniums will be due to the substitution effect.
E) 4/5 of the change will be due to the income effect.
Perfect Substitutes
are goods that can be completely exchanged for one another at a constant rate of substitution and possess identical levels of utility and functionality for consumers.
Substitution Effect
An alteration in consumer choice between two goods when the price of one good changes relative to the price of another, influencing the allocation of their budget.
Income Effect
The relationship between changing income in a person's life or the economy and the subsequent demand for certain goods or services.
- Grasp the relationship between price variations and consumer demand, highlighting the roles of income and substitution effects.
- Investigate the influence of variations in prices and earnings on the demand for merchandise, incorporating the importance of ideal substitutes and complements in the analysis.
Verified Answer
WW
Wesley WarrickMay 23, 2024
Final Answer :
D
Explanation :
Since delphiniums and hollyhocks are perfect substitutes, as the price of delphiniums rises to $7 per unit, consumers will switch to buying hollyhocks instead, resulting in a complete change in demand for delphiniums due to the substitution effect. There is no income effect since the price of hollyhocks has not changed. Therefore, the entire change in demand for delphiniums is due to the substitution effect, making choice D the best answer.
Learning Objectives
- Grasp the relationship between price variations and consumer demand, highlighting the roles of income and substitution effects.
- Investigate the influence of variations in prices and earnings on the demand for merchandise, incorporating the importance of ideal substitutes and complements in the analysis.