Bugs consumes carrots and lettuce, both of which are normal goods. Suppose the price of carrots rises.
Question:
a. Illustrate the substitution and income effects.
b. Does the substitution effect lead to an increase or a decrease in Bugs's lettuce consumption? Justify your answer.
c. Does the income effect lead to an increase or a decrease in Bugs's lettuce consumption? Justify your answer.
d. Assume Bugs spends very little of his income on carrots. When the price of carrots rises, do you expect his lettuce consumption to go up or down? Why?
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abcd The substitution effect is from A to C and the inco...View the full answer
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