Question

Ethan enjoys buying books and going to the movies. He has income of $150 to spend on these two goods each month. The price of a book is $15 and the price of going to the movies is also $15. He currently consumes four books and six movies a month. If the price of a book increases to $20, then:

Answer 1

Answer: A

Step-by-step explanation:

A.) the substitution effect would predict Ethan would consume less books and more movies and the income effect would predict he would consume less of both.

B.) the substitution and income effects would both predict Ethan would consume less of both goods.

C.) the substitution effect would predict Ethan would consume more books and less movies, and the income effect would predict he would consume less of both.

D.) the substitution and income effects would both predict Ethan would consume more of both goods.

If he continuos to buy 4 books ans 6 movies the total amount is $170, that he does not have. He has to buy less books or go less to the movies.

A global efect of a certain good (X) price rise can be divided into 2 efects:

• substitution effect: indicates a demand reduction of X, resulting from the price rise, making X less atractive to consumption
• income effect: indicates a reduction of the demanded quantity of X resulting from the reduction of the acquisition power created by the rise of X price.

So, answer is A.