The French Bakery ran a special which decreased the price of its croissants from $1.50 to $1.00.Although her money income had not changed, Toni decided to buy 2 croissants instead of her usual 1 bagel and 1 croissant.Toni's actions are explained by which of the following?

Question

Quizplus · Accepted Answer

Toni's decision to buy 2 croissants instead of her usual 1 bagel and 1 croissant is explained by both income effect and substitution effect. The decrease in the price of croissants (substitution effect) made them relatively cheaper compared to bagels, hence Toni decided to substitute bagel with croissant. On the other hand, the decrease in the price of croissant increased Toni's real purchasing power (income effect), which allowed her to buy more croissants with her given income.

The French Bakery Ran a Special Which Decreased the Price