Julie buys food and other goods. She has an income of 400 per month. The price of food is initially $1.00 per unit. It then rises to $1.20 per unit. The prices of other goods do not change. To help Julie out, her mother offers to send her a check each month to supplement her income. Julie tells her mother, "Thanks, Mom. If you would send me a check for $50 per month, I would be exactly as happy paying $1.20 per unit as I would have been paying $1.00 per unit and not receiving the $50 from you." Which of the following statements is true? Explain.
The increased price of food has:
a) An income effect of + $50 per month.
b) An income effect of - $50 per month.
c) A compensating variation of +$50 per month
d) A compensating variation of -$50 per month
e) An equivalent variation of +$50 per month
f) An equivalent variation of -$50 per month