Question

Suppose Jose splits his spending across scones and coffees. Due to droughts in coffee-producing regions, the price of coffee doubles. How will the income and substitution effects affect his spending on scones?

Answer 1

Answer:

He will be less likely to spend on scones.

Explanation:

Understanding the spending pattern requires to understand the factors involving in purchasing.

1. Income: Some people live tightly, and for that they have to cut down their expenditures and that affects their spending. Jose will not have much issues although buying scones because they will not be expensive, so this relationship is negative.
2. Substitution: This will probably affect the the spending of Jones on scones because he used to buy both together, and if he stops spending on coffee he will not buy scones as well.