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 income 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 income effect suggests that when the price of a good decreases, the consumer effectively has more purchasing power. With the price of ice cream dropping, Madison can afford more of both snacks within her budget.

Madison Has Set Aside $24 for Her Snack Budget This