3. Income and substitution effects Hilary has a so-called fruit budget, which sh
ID: 1220795 • Letter: 3
Question
3. Income and substitution effects
Hilary has a so-called fruit budget, which she uses to buy only apples and nectarines. Assume the price of apples increases. Which of the following is an example of the income effect?
*The increase in the price of apples makes apples relatively more expensive than nectarines, so Hilary will buy fewer apples and more nectarines.
*Because the price of apples increases, Hilary will choose to buy only nectarines and no apples.
*The increase in the price of apples decreases Hilary's real income, which forces Hilary to buy fewer fruits in general.
3. Income and substitution effects
Hilary has a so-called fruit budget, which she uses to buy only apples and nectarines. Assume the price of apples increases. Which of the following is an example of the income effect?
*The increase in the price of apples makes apples relatively more expensive than nectarines, so Hilary will buy fewer apples and more nectarines.
*Because the price of apples increases, Hilary will choose to buy only nectarines and no apples.
*The increase in the price of apples decreases Hilary's real income, which forces Hilary to buy fewer fruits in general.
Explanation / Answer
Because of increase in apple prices , Hilary's real income will decrease and that will make her buy less number of apples and therefore less number of fruits.
OPTION C
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