A consumer choosing between apples and oranges is at her best affordable point.Then the price of apples decreases.If both apples and oranges are normal goods,which one of the following statements is true about her new best affordable point?
A)She will consume more apples and more oranges.
B)She will consume more apples and fewer oranges.
C)She will consume fewer apples and more oranges.
D)She will consume fewer apples and fewer oranges.
E)She will consume more apples,and we do not know whether she will consume more or less oranges.

Question

Quizplus · Accepted Answer

When the price of apples decreases, the consumer can afford to buy more apples with the same budget, assuming apples are a normal good. This is known as the substitution effect, where the consumer substitutes apples for oranges because they are relatively cheaper. Additionally, there's an income effect; the consumer effectively has a higher real income and can buy more of both goods if they wish. However, the effect on orange consumption is uncertain without more information about the consumer's preferences and the relative price change's impact on her overall budget allocation. Therefore, we know she will consume more apples, but it's unclear whether she will consume more or fewer oranges.

A Consumer Choosing Between Apples and Oranges Is at Her