Bonnie spends her entire income, $200 on 3 goods, x₁, x₂and x₃. When p₁= $1, p₂= $3, and p₃=
$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 x₁ increases by 25% and Bonnie's quantity demanded for x₁ remains the same, it implies that x₁ is a Giffen good, which violates the law of demand. Therefore, option B is not true. Options A, C, and D are all true statements. The price elasticity of demand for x₁ must be one because Bonnie's quantity demanded for x₁ did not change after the price increase. Total revenue for x₁ is maximized because the price of x₁ is increased, which compensates for the decrease in quantity demanded, leading to an overall revenue increase. Total expenditure on x₁ is unchanged because the price change results in a decrease in quantity demanded and an increase in price, which offset each other.

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

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