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Joann divides her consumption between books and games. Both books and games are normal goods for Joann. If the price of games rises, and Joann has a very strong income effect,

(a) Do you expect her to buy more, fewer, or the same number of games?
(b) Do you expect her to buy more, fewer, or the same number of books? Explain your answer in 1-4 sentences.

User Jordan D
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1 Answer

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Final answer:

Joann is expected to buy fewer games due to the price increase and the strong income effect. She might also purchase fewer books, because her effective purchasing power has been reduced by the price increase for games, which could lead to a reduction in consumption of other normal goods.

Step-by-step explanation:

When the price of games rises, we would typically expect Joann to buy fewer games. This is because, as with all normal goods, when the price increases, the quantity demanded generally falls. This is known as the price effect. However, since Joann has a very strong income effect, it's possible that the reduction in her real income due to the higher price could lead her to cut back on games even more drastically than the price effect alone would suggest.

As for books, if they are also a normal good for Joann and there is a strong income effect from the higher price of games, she may also purchase fewer books. Because her real income has effectively fallen, Joann will likely reduce consumption of both normal goods to adjust to the new budget constraint.

User Ravi Hirani
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