Consider a consumer buying perfect complements. If there is a decrease in the price of good 1, the total change in consumption of good 1 is due to

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Question restatement: The problem asks about the total change in consumption of good 1 when there is a decrease in the price of good 1, for a consumer who purchases perfect complements. The answer choices are:
- none of the other options
- it depends on whether the good is inferior or normal
- the pure substitution effect minus the income effect
- the pure substitution effect
- the income effect

Now, evaluate each option in turn.

Option: none of the other options
This would be correct only if all other options were impossible explanations. However, at least one of the other options (the income effect) is a viable explanation for perfect complements, so this blanket “none” claim is not justified.

Option: it depends on whether the good is inferior or normal
For perfect complements, the qualitative nature of the goods (normal or inferior) does not change the mechanism: the consumer’s optimal bundle is in fixed proportions, so price changes affect the quantity demanded differently than for ordinary goods, but the standard decomposition still assigns the change to the income effect in this case. Therefore this conditional statement is not correct.

Option: the pure substitution effect minus the income effect
This expression does not align with the standard Slutsky or Hicks decompositions. The total effect equals substitution effect plus income effect (or equals Hicksian substitution effect, which for perfect complements may be zero, but not a subtraction of income from substitution). Subtracting income effect from substitution effect lacks theoretical basis here.

Option: the pure substitution effect
For perfect complements, the substitution effect is not the driver of a change in the quantity of good 1 when its price falls. Because the goods are consumed in fixed proportions, relative prices do not induce a substitution away from or toward combinations of the two goods; the consumer keeps the same ratio. Hence the substitution effect is not the primary mechanism for the observed total change.

Option: the income effect
This option aligns with the standard understanding for perfect complements: when the price of one good falls, the consumer’s purchasing power increases, allowing more of the fixed-proportion bundle to be bought. Since the ratio of the two goods remains fixed, the total change in consumption of good 1 is driven entirely by the income (real wealth) effect, not by substitution. In other words, the decrease in price increases purchasing power, enabling a higher quantity of the required bundle to be purchased, so good 1 consumption rises due to the income effect.

In summary, for perfect complements, the substitution effect is either negligible or not driving the change, and the total change in consumption of good 1 after a price decrease is attributed to the income effect. The most accurate choice reflecting this reasoning is the income effect.

ECON5001 Microeconomic Theory Quiz 2 (available 1 April, due 11 April)

Consider a consumer buying perfect complements. If there is a decrease in the price of good 1, the total change in consumption of good 1 is due to

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ECON5001 Microeconomic Theory Quiz 2 (available 1 April, due 11 April)

Consider a consumer buying perfect complements. If there is a decrease in the price of good 1, the total change in consumption of good 1 is due to

View Explanation

Log in for full answers

Similar Questions

Sarah usually buys 5 cups of coffee and 2 muffins every day. The price of coffee falls significantly. Explain how the substitution effect and the income effect influence Sarah’s decision to buy more coffee.

For Sarah, meals at McDonald’s are an inferior good. When the price of meals at McDonald’s increases, Sarah buys less McDonald’s meals. This means that:

If a good is normal and its price increases,

Which of the following occurs simultaneously with an income effect?

Rose is allocating her budget between two goods—Apples and Bananas; both are normal goods. If the price of apples increases from $1 per pound to $2 per pound, then the income effect causes her to buy ___of apples and the substitution effect causes her to buy___ of apples.

The effect of a change in relative price on consumer choice can be divided into:

Which of the following occurs simultaneously with an income effect?

Assume that a consumer has well-behaved preferences. Following a price increase for good 1, we observe that a consumer increases the quantity demanded for good 1. From this, we know that

More Practical Tools for Students Powered by AI Study Helper

Making Your Study Simpler

Rose is allocating her budget between two goods—Apples and Bananas; both are normal goods. If the price of apples increases from $1 per pound to $2 per pound, then the income effect causes her to buy _of apples and the substitution effect causes her to buy_ of apples.