Julie buys food and other goods. She has an income of $400 per month. The price of food is initially $1.00 per unit. It then rises to $1.20 per unit. The prices of other goods do not change. To help Julie out, her mother offers to send her a check each month to supplement her income. Julie tells her mother, “Thanks, Mom. If you would send me a check for $50 per month, I would be exactly as happy paying $1.20 per unit as I would have been paying $1.00 per unit and not receiving the $50 from you.” Which of the following statements is true? Explain. The increased price of food has: a) an income effect of +$50 per month b) an income effect of -$50 per month c) a compensating variation of +$50 per month d) a compensating variation of -$50 per month e) an equivalent variation of +$50 per month f ) an equivalent variation of -$50 per month
Julie buys food and other goods. She has an income of $400 per month. The
The increased price of food has:
a) an income effect of +$50 per month
b) an income effect of -$50 per month
c) a compensating variation of +$50 per month
d) a compensating variation of -$50 per month
e) an equivalent variation of +$50 per month
f ) an equivalent variation of -$50 per month
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