Ethan has $150 a month to spend on two normal goods-books and movie theater tickets. The price of a book is $15 and the price of a movie ticket is also $15. He currently consumes four books and six movies each month. If the price of a book drops to $10, the substitution effect predicts that Ethan will consume:

Question

Quizplus · Accepted Answer

The substitution effect occurs when a consumer reacts to a price change of one good by consuming more of the less expensive good and less of the more expensive one. Since the price of books has decreased, Ethan is likely to substitute books for movies, consuming more books (because they are now cheaper) and fewer movies.

Ethan Has $150 a Month to Spend on Two Normal