Maude thinks delphiniums and hollyhocks are perfect substitutes, one for one.If delphiniums currently cost $5 per unit and hollyhocks cost $6 per unit and if the price of delphiniums rises to $8 per unit,
A)the income effect of the change in demand for delphiniums will be bigger than the substitution effect.
B)there will be no change in the demand for hollyhocks.
C)the entire change in demand for delphiniums will be due to the substitution effect.
D)1/3 of the change will be due to the income effect.
E)2/3 of the change will be due to the income effect.

Question

Quizplus · Accepted Answer

Since Maude thinks delphiniums and hollyhocks are perfect substitutes, consumers will switch their demand from delphiniums to hollyhocks as the price of delphiniums rises. This change in demand is purely due to the substitution effect, as there is no change in income. Therefore, the entire change in demand for delphiniums is due to the substitution effect. There is no income effect in this scenario. The price change will not affect the demand for hollyhocks as they are not the subject of the price change.

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