Consider each of the five statements listed below. Read each statement and deter

Question

Consider each of the five statements listed below. Read each statement and determine if it describes the income effect, the substitution effect, or neither. The price of lobster doubles, making Henri feel less wealthy. As a result, Henri buys fewer lobsters. The price of chicken falls by 0.75 a pound. Since chicken is now relatively less expensive than other foods like ground beef, Mary buys more chicken and less beef. Suppose the average price of a DVD falls by 15 percent. Tom buys more DVDs because his monthly movie budget can now stretch further. Model Planes Incorporated reduces production of its wooden plane product line. Jessica sees that the price of orange juice is higher this week. She decides to buy less orange juice and more apple juice because orange juice is relatively more expensive.

Explanation / Answer

A. Price of lobsters ..... - Income effect (decrease in disposable income available for lobsters)

B. Price of chicken ..... - Substitution effect

C. Suppose the average price of a DVD .... - Income effect ((increase in disposable income available for DVDs)

D. Model Planes ...... - Neither, not related to either income or substitution

E. Jessica sees that .... - Substitution effect

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