Sam has $200 a month to spend on either tanning sessions or rounds of golf.Tanning sessions are $20 each,and a round of golf is $40.Sam currently consumes six tanning sessions and two rounds of golf.Both tanning and golf are normal goods.If the price of a round of golf drops to $20,the income and substitution effects will cause Sam's consumption of tanning sessions:
A) to increase, since both effects predict an increase.
B) to decrease, since both effects predict a decrease.
C) to change, but the direction is dependent upon which effect is stronger.
D) It is impossible to say what will happen without more information.

Question

Quizplus · Accepted Answer

The income effect will cause Sam to consume more of both goods, while the substitution effect will cause him to consume more tanning sessions and fewer rounds of golf. The overall effect on Sam's consumption of tanning sessions is ambiguous, as it depends on which effect is stronger.

Sam Has $200 a Month to Spend on Either Tanning