Assume you are consuming two goods,X and Y.X and Y are both normal goods but they are not close complements.The price of good X increases but the price of Y remains unchanged.However,you are given enough additional income to ensure that your utility remains unchanged.What happens to your consumption of good X?
A)it increases
B)it stays the same
C)it increases or decreases
D)it decreases
E)it increases over the long run

Question

Quizplus · Accepted Answer

Since good X has become relatively more expensive, the substitution effect causes you to consume less of it and more of Y. However, since you have been given enough additional income to keep your utility constant, the income effect allows you to consume more of both goods, but relatively less of good X since its price has increased. Overall, the substitution effect dominates, and your consumption of good X decreases.

Assume You Are Consuming Two Goods,X and Y