Madison has set aside $24 for her snack budget this month. Her favorite snacks are ice cream and chips. The price of a pint of ice cream is $4 and the price of a bag of chips is $3. She currently consumes three pints of ice cream and four bags of chips each month. If the price of a pint of ice cream drops to $3, the substitution effect predicts that Madison will consume:
A)more ice cream and more chips.
B)equal amounts of ice cream and chips.
C)more ice cream and fewer chips.
D)less ice cream and more chips.

Question

Quizplus · Accepted Answer

The substitution effect occurs when consumers react to a price change by consuming more of a cheaper good and less of a more expensive one. Since the price of ice cream drops to $3, making it the same price as chips, Madison is likely to buy more ice cream (because it's now cheaper relative to its previous price) and fewer chips, as she substitutes the now cheaper ice cream for chips.

Madison Has Set Aside $24 for Her Snack Budget This