Question

Mr. Rogers allows himself to spend $100 per month on candy and ice cream. Mr. R’s...

Mr. Rogers allows himself to spend $100 per month on candy and ice cream. Mr. R’s preferences for candy and ice cream are unaffected by the season of the year. If there is price change but the total change in ice cream consumption being zero, it must be that the income effect of this price change on his consumption of ice cream makes him buy more, less, or the same amount of ice cream? Please explain.

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Answer #1

Answer : The answer is "the same amount of ice cream".

Price changes create income effect. If price fall then consumer's income increase and if price rise then consumer's income decrease. Here price changes do not changes the total consumption of ice cream. This means that Mr. Rogers gets income effect due to price changes. But this income effect do not changes the ice cream consumption for Mr. Rogers. Therefore, Mr. Rogers purchases the same amount of ice cream after price change.

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