Melinda considers lattes and coffee to be good substitutes. Suppose the price of milk, a key ingredient used to produce lattes, falls. According to the income effect, which of the following is most likely to occur?
A) Melinda will purchase fewer lattes and more coffee.
B) Melinda will purchase more lattes and less coffee.
C) Melinda will purchase more of most goods due to her higher real income.
D) Melinda's demand curve will decrease (shift in), causing her to purchase fewer lattes.

Question

Quizplus · Accepted Answer

When the price of milk falls, the cost of producing lattes decreases, potentially lowering their price. This increases Melinda's real income, allowing her to purchase more of most goods, including lattes and coffee.

Melinda Considers Lattes and Coffee to Be Good Substitutes