Multiple Choice
Charlie consumes apples and bananas.His utility function is U(XA, XB) =xAx2B.The price of apples is $1 the price of bananas is $2, and his income is $30 per week.If the price of bananas falls to $1
A) Charlie demands fewer apples and more bananas.
B) the substitution effect of the fall in banana prices reduces his apple consumption, but the income effect increases his apple consumption by the same amount.
C) the substitution effect of the fall in the price of bananas reduces his banana consumption but the income effect increases his banana consumption by enough so that his banana consumption rises.
D) the income used to calculate the substitution effect is higher than his original income, since the change made Charlie better off.
E) More than one of the above is true.
Correct Answer:
Verified
Correct Answer:
Verified
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