Question #51393

Stella is an 8 year old that gets a monthly allowance of $10 from her parents. There are only two things that Stella likes to spend her allowance on: chocolate bars and packages of stickers. Assume that initially chocolate bars cost $1 each and packages of stickers cost $2 each.
Imagine that Stella has spent her allowance and made the optimal choice of consuming 2 chocolate bars and 4 packages of stickers. Suppose that we are given the information that Stella’s marginal utility from consuming more chocolate at this point is equal to 5. What is her marginal utility from a marginal increase in stickers? If Stella reduced the number of chocolate bars she consumed, would her marginal utility from chocolate bars increase or decrease? How would her total utility change?

Expert's answer

Stella gets a monthly allowance of $10. Pch = $1, Pps = $2. If as a result of the price change, the substitution effect caused Stella to increase her chocolate consumption by 4 chocolate bars, the income effect will be zero, because the change in consumption was only according to the substitution effect. We can't say whether Stella considers chocolate bars to be a normal or an inferior good, because we don't know the direction of the price change (increase or decrease). If the price decreased, then it is a normal good.

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