Suppose the Price of Potatoes Falls and We Observe a Decrease

question 11

Multiple Choice

Suppose the price of potatoes falls and we observe a decrease in an individual's purchases of potatoes.Which of the following can we infer?

• A)The income effect is negative and outweighs the substitution effect.
• B)The income effect is negative and reinforces the substitution effect.
• C)The income effect just offsets the substitution effect.
• D)The income effect is positive and exceeds the substitution effect.
• E)The substitution effect outweighs the income effect.

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Definitions:

Nonoperating Items

Income and expenses that are not related to the core operations of a business, such as gains or losses from investments or interest expense.

Depreciation Expense

The allocated amount of the cost of a fixed asset being charged to expense over the asset's useful life.

Accumulated Depreciation

The cumulative depreciation expense charged to a fixed asset from the time it first became operational.

Net Noncurrent Assets

The total value of a company’s long-term assets minus any liabilities directly associated with those assets.