Susie buys two goods: rounds of golf and massages. Suppose that the price of a round of golf is $20 and the price of a massage is $30. In a typical week, Susie will play two rounds of golf, getting 20 utils of satisfaction from the second round. She normally buys three massages each week, with the third giving her 30 utils of satisfaction. If she were to buy a fourth massage in a week, it would give her 20 utils of satisfaction. If the price of massages is reduced to $15, which of the following outcomes might we expect to occur?
A) Susie would leave her consumption choices unchanged because of diminishing marginal utility in the consumption of massages.
B) Susie would buy more massages and fewer rounds of golf, as predicted by the income effect.
C) Susie would buy more massages and more rounds of golf, as predicted by the substitution effect.
D) Susie would buy more massages and fewer rounds of golf, as predicted by the substitution effect.

Question

Quizplus · Accepted Answer

The reduction in price of massages would lead to an increase in the quantity demanded of massages due to both the income and substitution effects. The income effect would cause Susie to consume more of both goods because her purchasing power would increase. The substitution effect would also lead her to consume more massages and fewer rounds of golf, as the price of massages has become relatively cheaper compared to golf. Therefore, the best answer is D.

Susie Buys Two Goods: Rounds of Golf and Massages