Charlie consumes apples and bananas.His utility function is U(X_A, X_B)=x_Ax²_B.The price of apples is $1 the price of bananas is $2, and his income is $30 per week.If the price of bananas falls to $1 A)Charlie demands fewer apples and more bananas. B)the substitution effect of the fall in banana prices reduces his apple consumption, but the income effect increases his apple consumption by the same amount. C)the substitution effect of the fall in the price of bananas reduces his banana consumption but the income effect increases his banana consumption by enough so that his banana consumption rises. D)the income used to calculate the substitution effect is higher than his original income, since the change made Charlie better off. E)More than one of the above is true.

Question

Quizplus · Accepted Answer

When the price of bananas falls, the substitution effect leads Charlie to consume more bananas and fewer apples. However, the income effect from the price decrease allows him to afford more of both goods, potentially increasing his apple consumption to offset the substitution effect.

Charlie Consumes Apples and Bananas