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 $5 per unit,
A)there will be no change in the demand for hollyhocks.
B)the entire change in demand for delphiniums will be due to the substitution effect.
C)1/3 of the change in demand will be due to the income effect.
D)the income effect of the change in demand for delphiniums will be bigger than the substitution effect.
E)2/3 of the change in demand will be due to the income effect.

Question

Quizplus · Accepted Answer

According to the perfect substitution assumption, consumers will completely switch to the cheaper option when the price of one good increases. Therefore, there will be a complete substitution effect and no income effect. Choice A and E are incorrect because they mention an income effect, which is not present in this case. Choice C and D are also incorrect because they suggest that there will be an income effect, which is not possible with perfect substitutes.

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