Question

Consider goods and that are perfect substitutes. The original prices were $10 and $9 respectively.

His income is $720. If one day the price of is 8$, what will happen
a. The quantity of becomes 90 due to income
effect.
b. The quantity of is 80 due to substitution effects
will grow to
c. The quantity of is 90 due to substitution effects
will grow to
d. The quantity of is 80 due to substitution effects
will grow to
e. The above answers are incorrect

Answer 1

The above answers are incorrect.

Explanation:

If the price of one of the goods decreases, the quantity demanded of that good will increase due to the substitution effect. This means that the consumer will choose to buy more of the cheaper good and less of the more expensive good. The income effect may also come into play, as the consumer now has more disposable income due to the lower price of one of the goods. However, it is not possible to determine the exact quantity of each good that the consumer will purchase without further information.

In this case, if the price of one of the goods decreases from $10 to $8, the consumer will likely purchase more of that good and less of the other good, which is a substitution effect. The income effect may also come into play, as the consumer now has more disposable income due to the lower price of one of the goods. However, it is not possible to determine the exact quantity of each good that the consumer will purchase without further information.

Therefore, the correct answer is e. The above answers are incorrect.