Jeff is a rational consumer who spends his entire income on food and vacations. The table below
Question:
Jeff is a rational consumer who spends his entire income on food and vacations. The table below describes his marginal utility and the prices of food and vacations.
If the price of a vacation decreasesto $300, which of the following best describesthe income effect of this price change?
a) He will purchase more of both goods because his total income has increased.
b) He will purchase less food because the marginal utility per dollar spent on food has decreased.
c) The price of a vacation relative to food has decreased, so he will buy more vacations.
d) The marginal utility per dollar spent on vacations is lower, so he will increase how many vacations he purchases.
e) He now effectively has more disposable income, which he can spend on more vacations, more food, or both.