Determine whether each statement describes the income effect, the substitution effect, or neither. Assume that all other variables are held constant. The price of lobster doubles, making Henri feel less wealthy. As a result, Henri buys fewer lobsters. The price of chicken falls by $0.75 a pound. Since chicken is now relatively less expensive than ground beef, Mary buys more chicken and less beef. The average price of a DVD falls by 15 percent. Tom buys more DVDs because his monthly movie budget can now stretch further. Model Planes Incorporated reduces production of its wooden plane product line. Jessica sees that the price of orange juice is higher this week. She decides to buy less orange juice and more apple juice because orange juice is relatively more expensive.

The reduction in the quantity demanded of lobsters describes the income effect.

Mary substituting chicken for ground beef is an example of the substitution effect.

The increase in the quantity demanded of DVDs describes the income effect.

Reduction in the production of wooden plane does not describe the income or substitution effect.

The increase in the demand for orange juice is  an example of the substitution effect.

The substitution effect when a change in the price of a good leads consumers to substitute the demand for the good with other goods. If the price of the good increases, consumers buy cheaper substitutes. If the price of the good declines, consumers reduce the consumption of the substitute and increase the demand for that good.  

The income effect is when an increase in price lowers consumer's purchasing power, holding money income constant. This would lead to a fall in the quantity demanded of the good. When price decreases, purchasing power increases and consumers demand more of the good.

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Explanation:

Income effect is when the demand for a particular good or service changes because the real income of the person has changed.

Substitution effect arises when there is a reduction in the sales for a good or service due to a price rise and therefore the consumers have switched to a cheaper alternative. For example, if the price of beef rises, the consumers may shift and purchase more of chicken.

Based on the above scenario, the following will then be:

• The price of lobster doubles, making Henri feel less wealthy. As a result, Henri buys fewer lobsters.

Income effect

Henry's real income has changed, he has more money and hence reduces the purchase for lobsters because he sees it as inferior good.

• The price of chicken falls by $0.75 a pound. Since chicken is now relatively less expensive than ground beef, Mary buys more chicken and less beef.

Substitution effect

Mary has moved to a cheaper alternative in this situation.

• The average price of a DVD falls by 15 percent. Tom buys more DVDs because his monthly movie budget can now stretch further.

Income effect

• Model Planes Incorporated reduces production of its wooden plane product line.

No effect

No effect here as it's neither income effect not substitution effect.

• Jessica sees that the price of orange juice is higher this week. She decides to buy less orange juice and more apple juice because orange juice is relatively more expensive.

Substitution effect

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