23. Charlie has standard (bowed in toward the origin) indifference curves for th

Question

23. Charlie has standard (bowed in toward the origin) indifference curves for the only two goods he consumes, cereal and orange juice. When the price of cereal falls, Charlie buys more cereal and more orange juice than before. Which of the following must be true? i. The income effect on cereal outweighs the substitution effect on cereal as a result of this price change ii, The income effect on orange juice outweighs the substitution effect on orange juice as a result of this price change. A. ii. The income effect on orange juice outweighs the substitution effect on orange juice as a result of this price change. B. Both (i) and (ii) are true. C. i. The income effect on cereal outweighs the substitution effect on cereal as a result of this price change. D. Neither(i) nor (ii) is true.

Explanation / Answer

Solution: Option A

Explanation: As with fall in price people buy more cereal and orange juice thus income on orange juice effect outweighs the substitution effect on orange juice as a result og price change

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