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A substitution effect

Yangjie buys smoothies and sushi, The price of a smoothie is 5$ and the price of sushi is 1$ a piece. Each month, Yangjie spends all of her income and buys 10 smoothies and 20 pieces of sushi. Next month the price of a smoothie will fall to 3$ and the price of sushi will rise to 2$ a piece. Assume that Yagjie's preference map is similar to that in Fig. 8.3 (b). Use a graph to answer the following:
1. - Will Yangjie be able to buy 10 smoothies and 20 pieces of sushi next month?
2. - will she want to buy 10 smoothies and 20 pieces of sushi, explain why
3.- which situation does she prefer: smoothies at 5$ each and sushi at 1 $ a piece or smoothies at 3$ each and sushi at 2$ a piece?
4. If she changes the quantity that she buys, which good will she buy more of and which will she buy less
5. When the prices change next month will there be an income effect and a substitution effect at work or just one of them? explain

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a) Yangjie can still buy 10 smoothies and 20 pieces of sushi.
When Yangjie buys 10 smoothies at $5 each and 20 pieces of sushi at $1 each,
she spends $70 a month. Now that the price of a smoothie is $3 and the price of
sushi is $2 a piece, 10 smoothies and 20 pieces of sushi will cost $70. So Yangjie
can still buy 10 smoothies and 20 pieces of sushi.
b) Yangjie will not want to buy 10 smoothies and 20 pieces of sushi because the
marginal rate of substitution ...

Solution Summary

A substitution effect is demonstrated.

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