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Demand and the law of demand

Emily is a rational consumer who gets utility from socks and music lessons, and she considers both of these goods normal goods. Her marginal utility from socks is

50

utils and the price of socks is

$ 5

per pair. Her marginal utility from music lessons is

600

utils and the price of music lessons is

$ 60

If the price of music lessons falls to $$ 20$ ‍, which of the following best describes the income and substitution effects?

(Choice A)
The income effect is that she now can spend more on both goods. The substitution effect is that the price of music lessons relative to socks has decreased so she will definitely buy more music lessons.
(Choice B)
The income effect is that she got a raise from her employer. The substiution effect is that music lessons are now relatively cheaper so she will buy more music lessons.
(Choice C)
The income effect is that she will no longer buy socks because she has more income to spend on music lessons, so she will only buy music lessons.
(Choice D)
The substitution effect is that she now can spend more on either good. The income effect is that the price of music lessons relative to socks has decreased so she will definitely buy more music lessons.
(Choice E)
The income effect is that she effectively has more money to spend on either good. The substitition effect is that she will only buy socks now.

Microeconomics

Course: Microeconomics > Unit 2

Problem