Please help.. >__<?

Question

Harold can consume apples and oranges. He likes them equally well and currently is in consumer equilibrium. Then the price of oranges rises, while his income remains the same. What will happen to his consumption?


a. consumption of oranges decreases; consumption of apples increases

b. consumption of oranges increases; consumption of apples increases

c. consumption of oranges decreases; consumption of apples could either increase or decrease

d. consumption of oranges increases; consumption of apples decreases

e. consumption of oranges decreases; consumption of apples decreases

Answer 1

If he remains in consumer equilibrium, the answer is E

Answer 2

The answer is C!

Assuming that oranges are a 'normal good', quantity demanded will fall if the price goes up. What happens to apples depends on the income and substitution effects. Since oranges are now dearer than apples, the substitution effect means he will buy more apples. However, he now gets less pieces of fruit for his income, so the income effect says that he gets to consume less. You would need more information to work out which of these two effects dominates.