Asked by Jimmy Miller on Jul 11, 2024
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Maude thinks delphiniums and hollyhocks are perfect substitutes, one for one.If delphiniums currently cost $4 per unit and hollyhocks cost $5 per unit and if the price of delphiniums rises to $9 per unit,
A) the income effect of the change in demand for delphiniums will be bigger than the substitution effect.
B) 1/5 of the change in demand will be due to the income effect.
C) the entire change in demand for delphiniums will be due to the substitution effect.
D) there will be no change in the demand for hollyhocks.
E) 4/5 of the change in demand will be due to the income effect.
Perfect Substitutes
Goods or services that can be used in exactly the same way and to the same extent, where one can completely replace the other in consumption.
Income Effect
The alteration in income for a person or the economy and the resulting influence on the demand for a certain good or service.
Substitution Effect
The economic principle indicating how consumers react to a change in price by substituting a more expensive item with a cheaper alternative.
- Outline the distinctions between substitution and income effects in the perspective of consumer choice theory.
- Evaluate the influence of price adjustments on the preference for perfectly interchangeable options.
Verified Answer
Learning Objectives
- Outline the distinctions between substitution and income effects in the perspective of consumer choice theory.
- Evaluate the influence of price adjustments on the preference for perfectly interchangeable options.
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