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Chapter 6: 7QQ (page 133)

Ned buys wine and bread. When the price of wine rises the substitution effect induce Ned to buy _____ wine and _____ bread.

  1. more; more.

  2. more; less.

  3. less; more

  4. less; less.

Short Answer

Expert verified

The correct option is c) less; more.

Step by step solution

01

Defining the substitution effect

The substitution effect talks about how the quantity demand for goods changes after a change in the price of one of the goods. The consumer always prefers or selects the cheaper commodity. Thus, a fall in the price of one good will increase the demand for the other good and vice versa.

For example, if the price of goat meat increases, the consumer will start consuming more chicken since both are substitutes and can be replaced by each other.

02

Explanation for the correct option (c)

The bread and wine are both everyday goods, so if the price of wine increases, it would alter the consumption of wine and bread as the income level is fixed. With an increase in the price of wine, Ned will shift the consumption towards bread. He will find bread cheaper even though the bread鈥檚 price is the same. A rational consumer will never buy more of any product when the price increases, and less of any product whose price is not increasing.

Thus, Ned will consume less wine and more bread.

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Most popular questions from this chapter

Show a consumer鈥檚 budget constraint and indifference curves for wine and cheese. Show the optimal consumption choice. If the price of wine is \(3 per glass and the price of cheese is \)6 per pound, what is the marginal rate of substitution at this optimum?

Take Jeremy鈥檚 total utility information in Exercise 6.1, and use the marginal utility approach to confirm the choice of phone minutes and round trips that maximize Jeremy鈥檚 utility.

What is the rule relating the ratio of marginal utility to prices of two goods at the optimal choice? Explain why, if this rule does not hold, the choice cannot be utility-maximizing.

As a general rule, is it safe to assume that a change in the price of good will always has its most significant impact on the quantity demanded of that good, rather than on the quantity demanded of other goods? Explain

Marge buys pizza for \(10 and Pepsi for \)2. She has income of \(200. Her budget constraint will experience a parallel outward shift if.

a. the price of pizza falls to \)5, the price of Pepsi falls to \(1 and her income falls to 100.

b. the price of pizza rises to \)20, the price of Pepsi rises to \(4 and her income remains the same.

c. the price of pizza falls to \)8, the price of Pepsi falls to \(1 and her income rises to \)240.

d. the price of pizza rises to 20, the price of Pepsi rises to \(4 and her income rises to \)500.
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