Asked by Gabriel Matar on Jun 27, 2024
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Maude thinks delphiniums and hollyhocks are perfect substitutes, one for one.If delphiniums currently cost $5 per unit and hollyhocks cost $6 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) 1/4 of the change in demand will be due to the income effect.
C) there will be no change in the demand for hollyhocks.
D) the entire change in demand for delphiniums will be due to the substitution effect.
E) 3/4 of the change in demand will be due to the income effect.
Perfect Substitutes
Perfect substitutes are two goods that can be used in place of each other with no loss of utility or preference by consumers.
Income Effect
Refers to the change in an individual's or economy's purchase of goods and services resulting from changes in income levels.
Substitution Effect
The change in consumption patterns due to a change in relative prices, holding the consumer's level of utility constant.
- Differentiate between the income and substitution effects in the context of consumer choice theory.
- Analyze the effects of price changes on the demand for perfect substitutes.
Verified Answer
Learning Objectives
- Differentiate between the income and substitution effects in the context of consumer choice theory.
- Analyze the effects of price changes on the demand for perfect substitutes.
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