19. Dave has an income of $100 which he uses to purchase paper and pencils. Both paper and pencils sell for $5 each and he buys 10 units per month of each. Suppose the price of paper increases to $10 and at the same time Dave's Uncle Slutsky starts sending Dave an extra $50 each month. This means that his new income is $150. What do you predict will happen to his consumption of paper, and why?
- It will decrease because any change in demand is due entirely to the substitution effect, which is always negative.
- We cannot predict whether it will increase or decrease without knowing if paper is a normal or inferior good.
- We cannot predict whether it will increase or decrease without paper's income elasticity of demand.
- It will increase because the income effect will outweigh the substitution effect.
- It will decrease because we expect paper to be a Giffen good.
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