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 and substitution effects will cause Sam's consumption of tanning sessions to:
A)increase.
B)decrease.
C)change, but the direction is dependent upon which effect is stronger.
D)This cannot be answered without more information.

Question

Quizplus · Accepted Answer

The income effect would make Sam feel richer, potentially increasing consumption of both goods. The substitution effect would make golf relatively cheaper compared to tanning, potentially leading Sam to substitute golf for tanning. The net change in tanning sessions depends on which effect dominates.

Sam Has $200 a Month to Spend on Two Normal