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Fact 9.3.2 Boom Time for "Gently Used" Clothes
Most retailers are blaming the economy for their poor sales, but one store chain that sells used name-brand children's clothes, toys, and furniture is boldly declaring that an economic downturn can actually be a boon for its business. Last year, the company took in $20 million in sales, up 5% from the previous year. Sales are already up 5% this year.
Source: CNN, April 17, 2008
-Refer to Fact 9.3.2. If the price of used clothing falls and income remains the same, the substitution effect ________ the quantity of used clothing bought and the income effect ________ the quantity of used clothing bought.
A)increases; decreases
B)increases; increases
C)decreases; increases
D)decreases; decreases
E)does not change; increases

Question

Quizplus · Accepted Answer

According to the substitution effect, when the price of used clothing falls, consumers are likely to substitute it for more expensive new clothing, increasing the quantity of used clothing bought. However, the income effect states that when the price falls, consumers will have more purchasing power and may choose to buy more new clothing, decreasing the quantity of used clothing bought. Therefore, the substitution effect increases the quantity of used clothing bought, while the income effect decreases it, resulting in a net effect that depends on the magnitude of each effect. In this scenario, if the price of used clothing falls and income remains the same, the substitution effect would dominate over the income effect, resulting in an increase in the quantity of used clothing bought.

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