Susie buys two goods: rounds of golf and massages. Suppose that the price of a round of golf is $20 and the price of a massage is $30. In a typical week, Susie will play two rounds of golf, getting 20 utils of satisfaction from the second round. She normally buys three massages each week, with the third giving her 30 utils of satisfaction. If she were to buy a fourth massage in a week, it would give her 20 utils of satisfaction. If the price of massages is reduced to $15, which of the following outcomes might we expect to occur?
A)Susie would leave her consumption choices unchanged because of diminishing marginal utility in the consumption of massages.
B)Susie would buy more massages and fewer rounds of golf, as predicted by the income effect.
C)Susie would buy more massages and more rounds of golf, as predicted by the substitution effect.
D)Susie would buy more massages and fewer rounds of golf, as predicted by the substitution effect.

Question

Quizplus · Accepted Answer

When the price of massages decreases, Susie will likely buy more massages due to the substitution effect, as massages become relatively cheaper compared to rounds of golf. She may also buy fewer rounds of golf as she reallocates her spending towards the now cheaper massages.

Susie Buys Two Goods: Rounds of Golf and Massages