A substitution effect
Yangjie buys smoothies and sushi, The price of a smoothie is
5$ and the price of sushi is 1$ a piece. Each month, Yangjie spends all of her
income and buys 10 smoothies and 20 pieces of sushi. Next month the price of a
smoothie will fall to 3$ and the price of sushi will rise to 2$ a piece. Assume
that Yagjie’s preference map is similar to that in Fig. 8.3 (b). Use a graph to
answer the following:
1. – Will Yangjie be able to buy 10 smoothies and 20 pieces
of sushi next month?
2. – will she want to buy 10 smoothies and 20 pieces of
sushi, explain why
3.- which situation does she prefer: smoothies at 5$ each
and sushi at 1 $ a piece or smoothies at 3$ each and sushi at 2$ a piece?
4. If she changes the quantity that she buys, which good
will she buy more of and which will she buy less
5. When the prices change next month will there be an income
effect and a substitution effect at work or just one of them? explain
