Neville, in Problem 2, has a friend named Marmaduke. Marmaduke has the same demand function for claret as Neville, namely q = .02m - 2p, where m is income and p is price. Marmaduke's income is $8,000 and he initially had to pay a price of $40 per bottle of claret. The price of claret rose to $80. The substitution effect of the price change

Question

Quizplus · Accepted Answer

Using Marmaduke's demand function, we can calculate his initial demand at a price of $40 per bottle: 
q = 0.02(8000) - 2(40) = 80
When the price of claret rises to $80 per bottle, we can again use Marmaduke's demand function to calculate his new demand: 
q = 0.02(8000) - 2(80) = 64
The substitution effect can be calculated by taking the difference between the initial and new demand at the original price: 
80 - 64 = 16
Therefore, the substitution effect reduced Marmaduke's demand by 16 bottles. The correct answer is (C).

Neville, in Problem 2, Has a Friend Named Marmaduke