Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
It leads to increased consumption of that good due to higher real income.
B
It causes consumers to buy less of the good because they feel richer.
C
It has no effect on consumer choice.
D
It only affects necessities and not luxury goods.
Understanding the Answer
Let's break down why this is correct
Answer
When the price of a good decreases, the income effect means that consumers feel like they have more money to spend. This happens because they can buy the same amount of the good for less money, which frees up some of their income for other purchases. For example, if a favorite snack costs $2 instead of $3, consumers can buy the same number of snacks and still have an extra dollar to spend on something else. As a result, they might choose to buy more of that snack or use the extra money to buy a different item they enjoy. This change in purchasing behavior shows how the income effect can influence what consumers decide to buy.
Detailed Explanation
When the price of a good goes down, people feel like they have more money to spend. Other options are incorrect because Some might think that feeling richer means buying less; This answer suggests that price changes don't matter.
Key Concepts
Income effect
Topic
Marginal Utility and Consumer Choice
Difficulty
easy level question
Cognitive Level
understand
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