When the price of a good falls, consumers may increase the quantity consumed because they have greater total purchasing power. This statement describes the:
A) substitution effect.
B) income effect.
C) consumer equilibrium effect.
D) price effect.

Question

Quizplus · Accepted Answer

The statement describes the income effect, which is the change in quantity demanded of a good when the price of the good changes, holding constant the consumer's utility level. The fall in price increases the consumer's real income, leading them to increase the quantity demanded of the good. The substitution effect, on the other hand, refers to the change in quantity demanded of a good that results from a change in the relative price of the good to other goods. Consumer equilibrium effect and price effect are not relevant to this statement.

When the Price of a Good Falls, Consumers May Increase