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.

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BlackTom AI · Accepted Answer

The problem describes a change in the relative price of apples and asks us to decompose the total effect into income and substitution effects for two normal goods.
First, recognize that the price of apples rises from $1 to $2 per pound. This makes apples relatively more expensive, so the substitution effect will push the consumer to buy fewer apples and more of the relatively cheaper good (bananas), holding real income (and the consumer's utility level) constant.
Next, consider the income effect. Since both apples and bananas are normal goods, a rise in the price of apples reduces the consumer's purchasing power. With normal goods, a lower real income leads to a decrease in the quantity demanded of the good in question (apples) as well as typically of other goods, because the consumer can afford less overall.
Putting the two effects together, both the substitution effect (fewer apples due to higher relative price) and the income effect (fewer apples due to reduced purchasing power) move the quantity of apples downward. In the typical decomposition for a normal good with a price increase, this results in a decrease in the quantity of apples from both channels.
If an answer option exists that states apples are bought in smaller quantities due to both effects, that would align with the standard analysis. Conversely, any option claiming an increase in apples from either effect would be inconsistent with the substitution effect (which always reduces the quantity of the more expensive good) and/or the income effect for normal goods.
Note that the problem’s framing specifies normal goods, so the direction of both effects is downward for the quantity of apples when the price rises.
Finally, given the setup, the combined logic consistently supports a reduction in apple purchases from both the income and substitution effects.

ECON 2001.01 SP2025 (25209) Final exam

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.

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