Suppose that for Edwin,DVDs and trips to the movie theater are perfect substitutes.Currently,Edwin is spending all of his 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 Edwin consumes.

Question

Quizplus · Accepted Answer

Since DVDs and trips to the movie theater are perfect substitutes, the increase in price of DVDs will cause Edwin to substitute them with trips to the movie theater. This is the substitution effect. However, since he is currently spending all his income on trips to the movie theater, he cannot afford to buy any DVDs at the new price. Therefore, there is no income effect. Hence, the overall effect is only the substitution effect and it is equal to the price change, which is doubling in this case. Thus, the answer is C - the substitution effect will be zero.

Suppose That for Edwin,DVDs and Trips to the Movie Theater