Question

Emily buys only ice cream and chocolate and spends all of her income on the two items. Suppose the price of ice cream rises. Emily adjusts her optimal consumption bundle such that Emily now buys less ice cream and more chocolate at her new consumer equilibrium. According to marginal utility theory:_________

a. The substitution effect must have been bigger than the income effect since we observe Emily buying more chocolate.
b. The substitution effect must have been bigger than the income effect since we observe Emily buying less ice cream.
с. The income effect must have been bigger than the substitution effect since we observe Emily buying more chocolate.
d. The income effect must have been bigger than the substitution effect since we observe Emily buying less ice cream.

Answer 1

d. The income effect must have been bigger than the substitution effect since we observe Emily buying less ice cream.

Step-by-step explanation:

Since in the given situation it is mentioned that the ice cream is increased and she adjust her optimal consumption so that she purchased less ice cream and more chocolate so here the income effect would be high as compared with the subsitution effect as the high price of the ice cream decrease the real income with the actual income left and it would lead to purchase less