Suppose a Consumer Can Purchase Only Two Goods, Soap and Apples

question 8

Multiple Choice

Suppose a consumer can purchase only two goods, soap and apples. If the price of soap falls and the consumption of apples increases, we can conclude that the increased consumption of apples is due to

• A) the income effect only.
• B) both the income effect and the substitution effect.
• C) the deflation effect.
• D) neither the income effect nor the substitution effect.
• E) the substitution effect only.

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Definitions:

Screening Tool

A method or instrument used to assess or evaluate certain characteristics in individuals or scenarios, often used in healthcare, employment, and research.

Net Present Value

Net Present Value calculates the difference between the present value of cash inflows and the present value of cash outflows over a period, used to assess the profitability of investments.

Internal Rate

Often related to the internal rate of return (IRR), it is the discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero.

Cost Of Capital

The rate of return that a company must earn on its project investments to maintain its market value and attract investors.