Question

Jermaine spends his money on cucumbers and lettuce. If the price of cucumbers falls, the MU per dollar of cucumbers will _________ and Jermaine will __________ cucumbers for lettuce. LO7.4 a. Fall; substitute b. Rise; substitute c. Fall; supply d. Rise; demand

Short answer

The MU per dollar will rise, and Jermaine will substitute cucumbers for lettuce (option b).

Step-by-step solution

Understanding Marginal Utility per Dollar

To find the marginal utility (MU) per dollar for cucumbers, we divide the marginal utility of cucumbers by the price of cucumbers. When the price of cucumbers falls, the denominator in this fraction decreases.

Effect on Marginal Utility per Dollar

As the price of cucumbers decreases, dividing the same marginal utility by a lower price results in a higher value for MU per dollar. Thus, the MU per dollar of cucumbers rises.

Substitution Effect

With a higher MU per dollar, cucumbers now give more utility per dollar spent compared to lettuce, leading Jermaine to substitute cucumbers for lettuce.

Choosing the Correct Answer

Given the effects observed, Jermaine will find cucumbers more attractive than before because of the increased MU per dollar, leading to substituting cucumbers for lettuce. Thus, the correct option is 'b. Rise; substitute'.

Key concepts

Price Effect

When we talk about the price effect, we're looking at how a change in the price of a good affects the quantity demanded of that good. If the price of cucumbers drops, it generally becomes more appealing to buy more cucumbers. This is because the cost to get the same amount of cucumbers is now lower.
This effect can cause a noticeable shift in how a consumer like Jermaine allocates his budget. The price effect is fundamental because it directly influences consumer decisions. As prices change, the value perception of a product's utility per dollar shifts, encouraging buyers to adjust their consumption accordingly.

• A decrease in price makes an item more affordable, prompting higher demand.
• An increase in price makes it less affordable, leading to decreased demand.

Overall, the price effect is a significant aspect of understanding consumer behavior in economic theory.

Substitution Effect

The substitution effect comes into play when the price change of a good causes consumers to replace the more expensive item with a cheaper alternative. In Jermaine's case, when the price of cucumbers falls, their utility per dollar increases in comparison to lettuce. This encourages him to substitute cucumbers for lettuce, thereby maximizing his satisfaction from spending. While the substitution effect is relatively straightforward, it hinges on the idea that consumers always seek maximum utility. Simply put, if one product becomes less expensive, it's logical to switch from a relatively more expensive one, thereby gaining more value. Key points of the substitution effect include:

• Consumers switch to goods that provide more utility per dollar spent.
• Changes in prices alter relative affordability and consumer preference.

Understanding the substitution effect helps explain why consumers might change their purchasing patterns when prices vary.

Consumer Choice Theory

Consumer choice theory is a cornerstone of economics that explores how people decide to spend their money based on their preferences and budget constraints. It provides insight into the decision-making process of consumers like Jermaine. Jermaine's decision to buy more cucumbers when their price drops can be explained using this theory. He evaluates the satisfaction (or utility) gained from cucumbers and compares it to other goods like lettuce, given their prices and his available budget. The core ideas of consumer choice theory include:

• Consumers aim to maximize utility within the limits of their budget.
• Preferences and budget constraints are central to consumer decisions.
• Goods are chosen based on their utility per dollar ratio.

By applying consumer choice theory, we can predict how changes in market conditions influence consumer behavior. It enables us to understand decisions made under financial constraints, reflecting a significant aspect of economic studies.