Justin is a rational consumer who spends his entire income on guitar strings and jasmine tea, both of which he considers normal goods. The table below describes his marginal utility and the prices of guitar strings and jasmine tea.
\begin{tabular}{llll}
$P_{G S}$ & $M U_{G S}$ & $P_{J T}$ & $M U_{J T}$ \
\hline$\$ 7$ & 70 & $\$ 1$ & 10
\end{tabular}

If the price of guitar strings decreases to $\$ 2$, which of the following best describes how the substitution effect will impact how he allocates his budget?

Choose 1 answer:
(A) The relative prices of guitar strings and jasmine tea have changed, guitar strings becoming relatively cheaper. He will now purchase more of the relatively cheaper guitar strings.
(B) Guitar strings still cost more than jasmine tea, so he will buy more jasmine tea
(C) The price of both goods has effectively decreased, so he buys more of both goods.
(D) Justin's purchases of guitar strings have a bigger impact on his marginal utility per dollar that he spends on jasmine tea, so he will definitely buy more guitar strings.
(E) Justin now has more disposable income to spend on both guitar strings and jasmine tea.

Question

Justin is a rational consumer who spends his entire income on guitar strings and jasmine tea, both of which he considers normal goods. The table below describes his marginal utility and the prices of guitar strings and jasmine tea.
\begin{tabular}{llll}
$P_{G S}$ & $M U_{G S}$ & $P_{J T}$ & $M U_{J T}$ \
\hline$\$ 7$ & 70 & $\$ 1$ & 10
\end{tabular}

If the price of guitar strings decreases to $\$ 2$, which of the following best describes how the substitution effect will impact how he allocates his budget?

Choose 1 answer:
(A) The relative prices of guitar strings and jasmine tea have changed, guitar strings becoming relatively cheaper. He will now purchase more of the relatively cheaper guitar strings.
(B) Guitar strings still cost more than jasmine tea, so he will buy more jasmine tea
(C) The price of both goods has effectively decreased, so he buys more of both goods.
(D) Justin's purchases of guitar strings have a bigger impact on his marginal utility per dollar that he spends on jasmine tea, so he will definitely buy more guitar strings.
(E) Justin now has more disposable income to spend on both guitar strings and jasmine tea.

Accepted Answer

***A*** ∻Key Concept∻ ⚹Substitution Effect⚹ ∻Explanation∻ ⚹When the price of a good falls, it becomes relatively cheaper compared to other goods, leading a rational consumer to substitute away from the relatively more expensive goods towards the cheaper one.⚹◊How will the change in price of guitar strings impact Justin's consumption of jasmine tea in terms of the substitution effect?⍭ Generate me a similar question◊

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