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?
  1. It will decrease because any change in demand is due entirely to the substitution effect, which is always negative.
  2. We cannot predict whether it will increase or decrease without knowing if paper is a normal or inferior good.
  3. We cannot predict whether it will increase or decrease without paper's income elasticity of demand.
  4. It will increase because the income effect will outweigh the substitution effect.
  5. It will decrease because we expect paper to be a Giffen good.

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