Sam has $200 a month to spend on two normal goods-tanning sessions and rounds of golf. Tanning sessions are $20 each, and a round of golf is $40. Sam currently consumes six tanning sessions and two rounds of golf each month. If the price of a round of golf drops to $20, the income effect predicts that Sam will:
A)increase his consumption of both rounds of golf and tanning sessions.
B)double his consumption of rounds of golf.
C)consume more rounds of golf and fewer tanning sessions.
D)consume fewer rounds of golf and more tanning sessions.

Question

Quizplus · Accepted Answer

The income effect, in this case, implies that as the price of rounds of golf decreases to $20, the same amount of money now has more purchasing power, allowing Sam to potentially increase his consumption of both goods, assuming they are normal goods.

Sam Has $200 a Month to Spend on Two Normal