Question: Suppose that the consumer has the logarithmic preferences, defined by the utility function U ( c , c ' ) = ln c + b

Suppose that the consumer has the logarithmic preferences, defined by the utility function U(c,c')= ln c + b ln c', where b>0. For this consumer, an increase in the real interest rate r
involves only the income effect.
involves only the substitution effect.
has the substitution effect that is always stronger than the income effect.
has the income effect that is always stronger than the substitution effect
has ambiguous effects depending on whether the substitution or income effects dominate.

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