Ramen noodles were hotter than ever in 2010. Considered a bargain meal for cash-starved college students... In 2010, 4 billion individual packets were devoured in the United States, a 4 percent increase over 2006. Once students leave college for that first well-paying job, however, they stop eating Ramen. If the price of ramen falls, and income remains the same, describe the substitution and income effects that occur.

Question

Quizplus · Accepted Answer

The substitution effect would be positive because as the price of ramen noodles falls, consumers are likely to switch from other more expensive goods to ramen noodles. However, the income effect would be negative because as the price of ramen noodles falls, consumers may perceive it as an inferior good and may reduce consumption of it as their income increases.

Ramen Noodles Were Hotter Than Ever in 2010