The Analysis of Consumer Choice

3.6. Try It!

Ilana Drakulic has an entertainment budget of $200 per semester, which she divides among purchasing CDs, going to concerts, eating in restaurants, and so forth. When the price of CDs fell from $20 to $10, her purchases rose from 5 per semester to 10 per semester. When asked how many she would have bought if her budget constraint were $150 (since with $150 she could continue to buy 5 CDs and as before still have $100 for spending on other items), she said she would have bought 8 CDs. What is the size of her substitution effect? Her income effect? Are CDs normal or inferior for her? Which exhibit, Figure 7.4 "The Substitution and Income Effects of a Price Change" or Figure 7.5 "Substitution and Income Effects for Inferior Goods", depicts more accurately her demand curve for CDs?