JoAnn considers cola and plain sparkling water to be good substitutes. Suppose the price of sugar, a key ingredient used to produce cola, falls. According to the income effect, which of the following is most likely to occur?
A) JoAnn will purchase less cola and more sparkling water.
B) JoAnn will purchase more cola and less sparkling water.
C) JoAnn will purchase more of most goods due to her higher real income.
D) JoAnn's demand curve will decrease (shift in), causing her to purchase less cola.

Question

Quizplus · Accepted Answer

When the price of sugar falls, the cost of producing cola decreases, leading to a potential decrease in the price of cola. This effectively increases JoAnn's real income, allowing her to purchase more of most goods, including cola and other items, due to the income effect.

JoAnn Considers Cola and Plain Sparkling Water to Be Good