Question

a. Jake spends his money on only two things: t-shirts and donuts.  Suppose the price of donuts falls. Naturally, Jake buys more donuts. He buys fewer t-shirts. This means that for Jake, the   _______ dominates.

  

a. substitution effect

  

b. income effect

  

c. demand effect

  

d. butterfly effect

  

b. Becky spends her money on only two things: hiking boots and paintbrushes. For her, the income effect dominates. When the price of paintbrushes rises, Becky will naturally buy fewer paintbrushes. And she will buy   _______ hiking boots.

  

a. fewer

  

b. more

  

c. the same number of

Answer 1

a. Jake spends his money on only two things: t-shirts and donuts.  Suppose the price of donuts falls. Naturally, Jake buys more donuts. He buys fewer t-shirts. This means that for Jake, the   _______ dominates.

Answer : SUBSTITUTION EFFECT; OPTION A

The definition of the substitution effect itself, we can easily get the correct answer to the question. Substitution effect is the change in demand for a commodity or change in consumption pattern due to a change in relative price of commodities. More simply, when price of a good rises as compared to other, the consumer will substitute expensive good with cheaper goods. This effect of price is called substitution effect. Here when price of donuts falls Jake buy more donuts and less t-shirts. There tales place a substitution between donuts and t-shirts.

Thus the correct answer is SUBSTITUTION EFFECT.