Question

Tommy is an enthusiastic gardener who gets satisfaction from grass seed and grass fertilizer to use on his lawn. To make his lawn perfect, he always uses an equal proportion of grass seed and grass fertilizer in every lawn treatment. That is, every pound of grass seed he uses, he uses one pound of grass fertilizer. If the price of grass seed increases, the substitution effect from the price increase will cause Tommy to __________________.

Question 12 options:

	increase or decrease his consumption of grass seed, depending on whether grass seed is a normal or inferior good
	substitute away from grass fertilizer toward grass seed
	not change his consumption of grass seed and grass fertilizer at all
	substitute away from grass seed toward grass fertilizer

Answer 1

He uses an equal proportion of grass seed and fertilizer. If he uses one pound of grass seed then he also uses one pound of grass fertilizer.

But now, if the price of grass seed increases.

Substitution effect arises when there is a decrease in sales for a product because of increase in price. Thus consumers subsitute expensive alternatives for cheaper products when there is a price rise.

Thus the consumer will substitute away from grass seed because of the price hike toward grass fertilizer. Thus the last option is the answer.

1st is wrong as there is no substitution effect. 2nd is the exact opposite, as the consumer wouldn't go for grass seed because of the price rise. Because of the substitution effect he would change his consumption pattern, which is why this is wrong. Thus last option is the answer.