Jeff is a rational consumer who spends his entire income on food and vacations. The table below describes his marginal utility and the prices of food and vacations.
\begin{tabular}{llll}
Price of food & $M U_{ ext {food }}$ & Price of vacations & $M U_{ ext {vacations }}$ \
\hline$\$ 5$ & 20 & $\$ 500$ & 2,000
\end{tabular}

If the price of a vacation decreases to $\$ 300$, which of the following best describes the income effect of this price change?

Choose 1 answer:
(A) The price of a vacation relative to food has decreased, so he will buy more vacations.
(B) He now effectively has more disposable income, which he can spend on more vacations, more food, or both.
(c) The marginal utility per dollar spent on vacations is lower, so he will increase how many vacations he purchases.
(D) He will purchase more of both goods because his total income has increased.
(E) He will purchase less food because the marginal utility per dollar spent on food has decreased.

Question

Jeff is a rational consumer who spends his entire income on food and vacations. The table below describes his marginal utility and the prices of food and vacations.
\begin{tabular}{llll} 
Price of food & $M U_{	ext {food }}$ & Price of vacations & $M U_{	ext {vacations }}$ \
\hline$\$ 5$ & 20 & $\$ 500$ & 2,000
\end{tabular}

If the price of a vacation decreases to $\$ 300$, which of the following best describes the income effect of this price change?

Choose 1 answer:
(A) The price of a vacation relative to food has decreased, so he will buy more vacations.
(B) He now effectively has more disposable income, which he can spend on more vacations, more food, or both.
(c) The marginal utility per dollar spent on vacations is lower, so he will increase how many vacations he purchases.
(D) He will purchase more of both goods because his total income has increased.
(E) He will purchase less food because the marginal utility per dollar spent on food has decreased.

Accepted Answer

∻Solution∻ ‖ a ⋮ Income Effect: The income effect refers to the change in consumption resulting from a change in real income. When the price of a vacation decreases from $500 to $300, Jeff's real income effectively increases because he can now afford more vacations with the same amount of money. ‖ ‖ b ⋮ Disposable Income: With the price of vacations decreasing, Jeff now has more disposable income. This additional income can be spent on more vacations, more food, or both, depending on his preferences. ‖ ∻Answer∻ ⚹ (B) He now effectively has more disposable income, which he can spend on more vacations, more food, or both. ⚹ ∻Key Concept∻ ⚹ Income Effect ⚹ ∻Explanation∻ ⚹ The income effect occurs when a decrease in the price of a good increases the consumer's real income, allowing them to purchase more of that good or other goods. In this case, Jeff can now afford more vacations, more food, or both due to the decrease in the price of vacations. ⚹◊How would a change in the price of vacations affect Jeff's consumption bundle based on the information provided?⍭ Generate me a similar question◊

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