Assume that a college student purchases only Ramen noodles and textbooks. If Ramen noodles are an inferior good and textbooks are a normal good, then the substitution effect associated with a decrease in the price of a textbook, by itself, will result in
A)a decrease in the consumption of textbooks and a decrease in the consumption of Ramen noodles.
B)a decrease in the consumption of textbooks and an increase in the consumption of Ramen noodles.
C)an increase in the consumption of textbooks and an increase in the consumption of Ramen noodles.
D)an increase in the consumption of textbooks and a decrease in the consumption of Ramen noodles.

Question

Quizplus · Accepted Answer

The substitution effect states that as the price of a good decreases, consumers will substitute towards that good and away from other goods that have become relatively more expensive. In this case, as the price of textbooks decreases (a normal good), the consumer will likely increase their consumption of textbooks and decrease their consumption of Ramen noodles (an inferior good) due to the substitution effect. Therefore, choice D is the correct answer.

Assume That a College Student Purchases Only Ramen Noodles and Textbooks