Pat applies the rational spending rule and purchases 5 units of potato chips and 3 units of lemonade Suppose the price of lemonade increases.One can predict that Pat will
A)cease purchasing lemonade.
B)reduce purchases of lemonade and increase purchases of potato chips.
C)continue to make the same purchases.
D)reduce purchases of potato chips.

Question

Quizplus · Accepted Answer

According to the rational spending rule, when the price of one good increases, the consumer should reduce their purchases of that good and increase their purchases of a substitute good. In this case, if the price of lemonade increases, Pat would likely reduce their purchases of lemonade and increase their purchases of potato chips as an alternative. Option A (ceasing the purchase of lemonade) is too extreme, and option C (making the same purchases) and option D (reducing purchases of potato chips) do not follow the rational spending rule.

Pat Applies the Rational Spending Rule and Purchases 5 Units