Maude thinks delphiniums and hollyhocks are perfect substitutes, one for one.If delphiniums currently cost $2 per unit and hollyhocks cost $3 per unit and if the price of delphiniums rises to $7 per unit,
A)there will be no change in the demand for hollyhocks.
B)the income effect of the change in demand for delphiniums will be bigger than the substitution effect.
C)1/5 of the change will be due to the income effect.
D)the entire change in demand for delphiniums will be due to the substitution effect.
E)4/5 of the change will be due to the income effect.

Question

Quizplus · Accepted Answer

Since delphiniums and hollyhocks are perfect substitutes, as the price of delphiniums rises to $7 per unit, consumers will switch to buying hollyhocks instead, resulting in a complete change in demand for delphiniums due to the substitution effect. There is no income effect since the price of hollyhocks has not changed. Therefore, the entire change in demand for delphiniums is due to the substitution effect, making choice D the best answer.

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