Assume that a college student purchases only coffee and almonds.If coffee is an inferior good and almonds are a normal good,what will the income effect associated with an increase in the price of almonds result in
A)a decrease in the consumption of both almonds and coffee
B)a decrease in the consumption of almonds and an increase in the consumption of coffee
C)an increase in the consumption of both almonds and coffee
D)an increase in the consumption of almonds and a decrease in the consumption of coffee

Question

Quizplus · Accepted Answer

Since almonds are a normal good, an increase in their price will reduce the purchasing power of the student, leading to a decrease in the consumption of almonds (income effect). At the same time, since coffee is an inferior good, the decrease in purchasing power will lead to an increase in the consumption of coffee (substitution effect). Therefore, the overall effect will be a decrease in the consumption of almonds and an increase in the consumption of coffee.

Assume That a College Student Purchases Only Coffee and Almonds