3. Income and substitution effects Frances has a so-called fruit budget, which s
ID: 1105024 • Letter: 3
Question
3. Income and substitution effects
Frances has a so-called fruit budget, which she uses to buy only pears and avocados. Assume the price of pears decreases. Which of the following is an example of the income effect?
Because the price of pears decreases, Frances will choose to buy only pears and no avocados.
The decrease in the price of pears increases Frances's real income, which enables Frances to buy more fruits in general.
The decrease in the price of pears makes pears relatively less expensive than avocados, so Frances will buy more pears and fewer avocados.
Explanation / Answer
Correct option: The decrease in the price of pears increases Frances's real income, which enables Frances to buy more fruits in general.
As per the income effect, a fall in price of a good acts like an increase in the relative income of the consumer.
So as price of pears decreases, demand for both fruits by Frances will increase as her real income has now increased.
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.