Asked by
Gabrielle Sackmann
on Dec 01, 2024
Verified
Walt considers x and y to be perfect substitutes.They originally cost $10 and $9 respectively.His income is $720.One day the price of x drops to $8.
A) The income effect increases the quantity of y by 90.
B) The substitution effect increases the quantity of y by 80.
C) The substitution effect increases the quantity of x by 90.
D) The income effect increases the quantity of x by 80.
E) None of the above.
Substitution Effect
The economic principle that as the price of a good increases, consumers will replace it with cheaper alternatives.
Income Effect
The variation in income for a person or an economy and its impact on the demand for a specific good or service.
Perfect Substitutes
Goods that can serve the same purpose perfectly, where consumers are indifferent between them and will select based on price.
- Analyze the effects of price changes on consumer demand through the substitution and income effects.
- Recognize the impact of changes in prices and income on consumption bundles with respect to different types of preferences (strictly convex, perfect substitutes, and perfect complements).
Verified Answer
SW
Learning Objectives
- Analyze the effects of price changes on consumer demand through the substitution and income effects.
- Recognize the impact of changes in prices and income on consumption bundles with respect to different types of preferences (strictly convex, perfect substitutes, and perfect complements).