Suppose that a consumer has $200 to spend on two goods: beer and pretzels. The price of beer is $6.00 and the price of pretzels is $3.00. The price of beer decreases to $3.00. Because beer is now cheaper relative to pretzels, the consumer will want to consumer more beer and fewer pretzels. This is an example of which of the following? O The income effect A giffen good The substitution effect Bowed indifference curve

Suppose that a consumer has $200 to spend on two goods: beer and pretzels. The price of beer is $6.00 and the price of pretzels is $3.00. The price of beer decreases to $3.00. Because beer is now cheaper relative to pretzels, the consumer will want to consumer more beer and fewer pretzels. This is an example of which of the following? O The income effect A giffen good The substitution effect Bowed indifference curve

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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K Paul consumes only books and DVDs. At his current consumption bundle, his marginal utility from DVDS is 25 and from books is 3. Each DVD costs $13, and each book costs $2. Is he maximizing his utility? Explain. Let MUB be the marginal utility of books, MUD be the marginal utility from DVDs, PB be the price of books, Pp be the price of DVDs, and MRS be the marginal rate of substitution. Paul is OA. maximizing his utility because MUB PB = MUD PD MUB MUD OB. not maximizing his utility because < PB PD MUB OC. maximizing his utility because MRS = MUD MUB MUD OD. maximizing his utility because < PB PD MUB O E. not maximizing his utility because MRS < MUD If he is not, how can he increase his utility while keeping his total expenditure constant? Paul could increase utility while keeping total expenditures constant by consuming more and fewer
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