Ethan enjoys buying books and going to the movies.He has income of $150 to spend on these two goods each month.The price of a book is $15 and the price of going to the movies is also $15.He currently consumes four books and six movies a month.If the price of a book increases to $20,then:
A) the substitution and income effects would both predict Ethan would consume more of both goods.
B) the substitution and income effects would both predict Ethan would consume less of both goods.
C) the substitution effect would predict Ethan would consume more books and less movies, and the income effect would predict he would consume less of both.
D) the substitution effect would predict Ethan would consume less books and more movies and the income effect would predict he would consume less of both.

Question

Quizplus · Accepted Answer

When the price of books increases, the substitution effect suggests Ethan will buy fewer books and more movies because movies are relatively cheaper. The income effect suggests he will consume less of both goods because his purchasing power has decreased.

Ethan Enjoys Buying Books and Going to the Movies