Maude thinks delphiniums and hollyhocks are perfect substitutes, one for one.If delphiniums currently cost $4 per unit and hollyhocks cost $5 per unit and if the price of delphiniums rises to $9 per unit,
A)the income effect of the change in demand for delphiniums will be bigger than the substitution effect.
B)1/5 of the change in demand will be due to the income effect.
C)the entire change in demand for delphiniums will be due to the substitution effect.
D)there will be no change in the demand for hollyhocks.
E)4/5 of the change in demand will be due to the income effect.

Question

Quizplus · Accepted Answer

Since delphiniums and hollyhocks are perfect substitutes, consumers will switch entirely to hollyhocks when the price of delphiniums rises to $9 per unit. Therefore, the entire change in demand for delphiniums will be due to the substitution effect, as there is no income effect since income has not changed. The price of hollyhocks may increase due to the increase in demand, but it is not mentioned in the question.

Maude Thinks Delphiniums and Hollyhocks Are Perfect Substitutes, One for One.If