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Suppose you currently consume 10 cups of coffee per week, at a cost of $4 each, at the local Fourbucks. One day you arrive to discover that the coffee shop has changed its name to Fivebucks and is now charging $5 per cup. (Assume coffee is a normal good.)

a. Will the substitution effect move you toward more or less consumption of coffee?

b. Will the income effect move you toward more or less consumption of coffee?

c. Combining your answers to (a) and (b), can you be sure which direction your coffee consumption will go?

d. Can you be sure whether you will be spending more money, less money, or the same amount of money on coffee as before (where the alternative is to keep remaining money for other things)? describe your answer, including a discussion of the relevant price elasticity issues.

Microeconomics, Economics

  • Category:- Microeconomics
  • Reference No.:- M948997

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