Mary has homothetic preferences.When her income was $1,000, she bought 40 books and 60 newspapers.When her income increased to $1,500 and prices did not change, she bought

A) 60 books and 90 newspapers.
B) 80 books and 120 newspapers.
C) 60 books and 60 newspapers.
D) 40 books and 120 newspapers.
E) There is not enough information for us to determine what she would buy.

Question

REBECCA DONAHUE · Accepted Answer

Final Answer : A, Explanation :  Homothetic preferences imply that when income changes, consumers change their consumption in the same proportion for all goods, maintaining the same consumption bundle ratio. Mary's original ratio of books to newspapers is 40:60 or 2:3. When her income increases by 50% (from $1,000 to $1,500), her consumption of both goods should also increase by 50%, maintaining the 2:3 ratio. Therefore, she would buy 60 books (40 * 1.5) and 90 newspapers (60 * 1.5).

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