Ch.5 HW - 5. (a) The substitution effect causes her to buy...

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Anthony Marsala Professor Woodbury EC251H Sec. 2 Ch. 5 Homework Pg. 144 #4, 5 4. When goods are normal, the income effect reinforces the substitution effect  because as more income is available, people buy more of a normal good  and less of its substitute.  When goods are inferior, the income effect offsets  the substitution effect because as more income is available, people buy less  of an inferior good and more of its substitute.
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Unformatted text preview: 5. (a) The substitution effect causes her to buy more clothes because clothing is a normal good and therefore when she has more income as a result of the price drop she will buy more clothes and less of a substitute such as food. (b) The income effect causes her to buy more clothing because the price drop effectively increased her available income to spend on clothes....
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This note was uploaded on 10/04/2011 for the course EC 251h taught by Professor Woodbury during the Fall '10 term at Michigan State University.

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