Consider an indifference curve based around video games and pizza. If the price of pizza falls, what would have to be true for the consumer to buy less pizza compared with when the price of pizza was higher?
A) Pizza and video games would be perfect substitutes.
B) The income effect would be greater than the substitution effect.
C) Consumption would lie on the same indifference curve.
D) The consumer would be buying as a suboptimal consumption bundle.

Question

Quizplus · Accepted Answer

When the price of pizza falls, the consumer's purchasing power increases due to the income effect. This may lead the consumer to buy more of both pizza and video games, but it could also lead the consumer to buy less pizza and more video games. Whether the consumer buys more or less pizza depends on the relative strength of the substitution and income effects. If the income effect is greater than the substitution effect, the consumer will buy less pizza compared to when the price was higher. Therefore, option B is the correct choice.

Consider an Indifference Curve Based Around Video Games and Pizza