Chapter 46, Problem 1CYU

a)

To determine

Whether there is an income effect, the substitution effect, or both, whether the movement is in the same direction or the opposite direction when orange juice shows a small share of C's spending and she buys more lemonade and less orange juice when the price of orange is high.

Explanation of Solution

A replacement or substitution effect is a shift in consumption brought on by a price adjustment for the same good without a corresponding change in the good's utility.

Therefore, in this case, only the substitution impact happens as C moves to lemonade when the price of oranges increases in the market.

Economics Concept Introduction

Introduction: The set of economic factors such as price and quantity that operates the economy regularly is called equilibrium in the economy.

b)

To determine

Whether there is an income effect, the substitution effect, or both, whether the movement is in the same direction or opposite direction when apartment rents have increased dramatically in the current year and rent absorbs a major part of her income.

Explanation of Solution

There is an income effect and substitution effect that occurred in this scenario because of a change in purchasing power and a substitution effect. Because a change in price causes a change in consumption which means both the income effect and the substitution effect is there, and the movement is all going in the same direction. It happens because the (apartment) good is a normal one and with the rent increase, D moves to a smaller apartment.

Economics Concept Introduction

Introduction: The set of economic factors such as price and quantity that operates the economy regularly is called equilibrium in the economy.

c)

To determine

Whether there is an income effect, the substitution effect, or both, whether the movement is in the same direction or opposite direction when the cost of a semester-long meal ticket at the student cafeteria increases which results that many students having less money to spend on the weekend.

Explanation of Solution

As the cafeteria meal is an inferior good in this case which means by lowering the income, the purchases of goods increase.

Therefore, the influence of income is there, however, the substitution effect moves in the opposite direction, where a smaller quantity occurs as a result.

In this situation, both the income impact and the substitution effect are present, but they go in different directions.

Economics Concept Introduction

Introduction: A global decentralized market for trading currencies is known as the foreign exchange market and for every currency, the foreign exchange rates are set by this market.