Bonnie spends her entire income, $200 on 3 goods, x₁, x₂and x₃. When p₁x₁= $1, p₂x₂= $3, and p₃x₃= $5, she buys the following consumption bundle: (15, 20, 25). The price of x₁increases by 25%, and she now buys 15 units of x₂and 28 units of x₃. Which of the following is not true:

Question

Quizplus · Accepted Answer

If the price of x₁increases and Bonnie buys more of x₂ and x₃, then x₁ could be a Giffen good. This means that the substitution effect is negative and larger than the income effect. Therefore, choice D is the correct answer as it is the only option that differs from the other statements. A is true because the price of x₁has increased, which means the total revenue has gone up due to the inelastic demand. B is true because the price elasticity of demand for x₁is one. C is true because the total expenditure on x₁ is unchanged since Bonnie’s income is constant.

Bonnie Spends Her Entire Income, $200 on 3 Goods, X1

Bonnie Spends Her Entire Income, $200 on 3 Goods, X₁