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

Accepted Answer

***A*** ∻Key Concept∻ ⚹Income Effect⚹ ∻Explanation∻ ⚹When the price of a good decreases, the consumer's purchasing power increases, allowing them to buy more of that good or other goods with their income.⚹◊What is the formula for calculating the income effect in microeconomics?⍭ Generate me a similar question◊

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