b. For rice, the substitution effect and the income effect are equivalent in magnitude. O it is impossible to determine the relative magnitudes of the substitution and income effects. the income effect dominates the susbstitution effect. the substitution effect dominates the income effect. c. For pasta, the substitution effect dominates the income effect. the substitution effect and the income effect are equivalent in magnitude. it is impossible to determine the relative magnitudes of the substitution and income effects. the income effect dominates the susbstitution effect.

b. For rice, the substitution effect and the income effect are equivalent in magnitude. O it is impossible to determine the relative magnitudes of the substitution and income effects. the income effect dominates the susbstitution effect. the substitution effect dominates the income effect. c. For pasta, the substitution effect dominates the income effect. the substitution effect and the income effect are equivalent in magnitude. it is impossible to determine the relative magnitudes of the substitution and income effects. the income effect dominates the susbstitution effect.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

b. For rice,
the substitution effect and the income effect are equivalent in magnitude.
it is impossible to determine the relative magnitudes of the substitution and income effects.
the income effect dominates the susbstitution effect.
the substitution effect dominates the income effect.
c. For pasta,
the substitution effect dominates the income effect.
the substitution effect and the income effect are equivalent in magnitude.
it is impossible to determine the relative magnitudes of the substitution and income effects.
the income effect dominates the susbstitution effect.

Suppose that Sonya faces an increase in the price of pasta, as depicted below, moving her from an optimum bundle of rice and
pasta at A to an optimum bundle at B.
Quantity of pasta (cups)
10 BCI
9
a
m
2
1
0
BC2
0
1
2
A
3 -4 5 6
Quantity of rice (cups)
7
A'
U₁
BC'
9 10
a. Move the line labelled BC to show a hypothetical budget line that illustrates the substitution effect. Place point A'at the
coordinates representing the substitution effect isolated from the income effect.

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