The graph to the right depicts an economy, Home, which produce flowers and soybe

Question

The graph to the right depicts an economy, Home, which produce flowers and soybeans. Its production possibilities Trade in the Standard Model (Home) Soybean Production frontier is shown as TT. One of Home's isovalue lines is also shown as VV. Home exists and trades with a second country, Foreign which also produces flowers and soybeans Suppose that (P/Ps) has increased. Then, O A. the income effect leads to an increase in consumption of flowers and soybeans while the substitution effect O B. the income effect leads to a decrease in consumption of flowers and soybeans while the substitution effect ° C, the substitution effect leads to a decrease in consumption of flowers and soybeans while the income effect O D. the substitution effect leads to an increase in consumption of flowers and soybeans while the income effect IC causes fewer flowers to be consumed and more soybeans to be consumed causes fewer soybeans to be consumed and more flowers to be consumed. causes more flowers to be consumed and fewer soybeans to be consumed. causes fewer flowers to be consumed and fewer soybeans to be consumed lower

Explanation / Answer

Solution: The income effect causes an increase in consumption of flowers and soybeans, while the substitution effect causes fewer flowers to be consumed and more soybeans to be consumed

Explanation: When the relative price of flowers increases, then Home will have surplus and export flowers thus income effect results to an increase in consumption of flowers and soybeans, but the substitution effect leads to fewer flowers to be consumed and more soybeans to be consumed

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