Asksia AI LOGO

Sia

Question
Microeconomics
Posted 20 days ago

Emily is a rational consumer who gets utility from socks and music lessons, and she considers both of these goods normal goods. Her marginal utility from socks is 50 utils and the price of socks is $5\$ 5 per pair. Her marginal utility from music lessons is 600 utils and the price of music lessons is $60\$ 60

If the price of music lessons falls to $20\$ 20, which of the following best describes the income and substitution effects?

Choose 1 answer:
(A) The substitution effect is that she now can spend more on either good. The income effect is that the price of music lessons relative to socks has decreased so she will definitely buy more music lessons.
(B) The income effect is that she effectively has more money to spend on either good. The substitition effect is that she will only buy socks now.
(c) The income effect is that she will no longer buy socks because she has more income to spend on music lessons, so she will only buy music lessons.
(D) The income effect is that she now can spend more on both goods. The substitution effect is that the price of music lessons relative to socks has decreased so she will definitely buy more music lessons.
() The income effect is that she got a raise from her employer. The substiution effect is that music lessons are now relatively cheaper so she will buy more music lessons.
Sign in to unlock the answer
Answer from Sia
Posted 20 days ago
Solution
a
Substitution Effect: The substitution effect occurs when a price change makes a good relatively cheaper or more expensive compared to other goods. In this case, the price of music lessons falls from 60to60 to 20, making music lessons relatively cheaper compared to socks. Therefore, Emily will substitute music lessons for socks, increasing her consumption of music lessons
b
Income Effect: The income effect occurs when a price change affects the consumer's real income or purchasing power. With the price of music lessons falling, Emily's real income effectively increases because she can now buy the same amount of music lessons for less money, leaving her with more income to spend on either good. Since both goods are normal goods, she will likely increase her consumption of both socks and music lessons
Answer
D. The income effect is that she now can spend more on both goods. The substitution effect is that the price of music lessons relative to socks has decreased so she will definitely buy more music lessons.
Key Concept
Income and Substitution Effects
Explanation
The income effect increases Emily's purchasing power, allowing her to buy more of both normal goods. The substitution effect makes music lessons relatively cheaper, leading her to buy more music lessons.

Not the question you are looking for? Ask here!

Enter question by text

Enter question by image

Upgrade to Asksia Pro

Join a AskSia's Pro Plan, and get 24/7 AI tutoring for your reviews, assignments, quizzes and exam preps.

Unlimited chat query usages
Strong algorithms that better know you
Early access to new release features
Study Other Question