Suppose that for Emily, DVDs and trips to the movie theater are perfect substitutes. Currently, Emily is spending all of her income on trips to the movie theater. If the price of DVDs doubles, the substitution effect will
A)be two times the income effect.
B)be half the income effect.
C)be zero.
D)always increase the number of trips to the movie theater Emily makes.

Question

Quizplus · Accepted Answer

Since DVDs and trips to the movie theater are perfect substitutes, when the price of DVDs doubles, Emily will switch completely to trips to the movie theater. This means there will be no substitution effect, as Emily is already consuming as much of this good as possible. The income effect will still occur, however, as her purchasing power has decreased due to the increased price of DVDs. Therefore, the correct answer is C, as there will be no substitution effect.

Suppose That for Emily, DVDs and Trips to the Movie