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Microeconomics

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Income and Substitution Effects: The Simple Life

MICRO-LAI7ZB

Darleen and Simon are siblings. They both receive the same sizeable inheritance, enough to live on. Neither of them holds a job, and live on the same amount of money.

Darleen lives in the city and loves it. She has thousands of consumer goods within easy reach. She loves variety, and spends about an equal amount of her income on every good available to her. One of these goods is wine.

Simon is more of a hermit. He moved way, way out to the countryside. There is one general store available to him, which sells just two goods: wine and rice. Simon spends about an equal amount of money on these two things.

The price of wine decreases. Is the income effect likely to be larger for Darleen or for Simon?

A

The income effect is larger for Darleen.

B

The income effect is larger for Simon.

C

The income effects will be equal.

D

There is not enough information to tell.