Assume the price of pizza decreases. As a result, your real income increases and you increase the quantity of pizza purchased each month. This is an example of the:
A) substitution effect.
B) income effect.
C) revenue effect.
D) consumer price effect.

Question

Quizplus · Accepted Answer

This is an example of the income effect, as the decrease in price of pizza increases the purchasing power of the consumer, leading to an increase in quantity demanded. The substitution effect would come into play if the consumer chose to buy pizza instead of another good due to the decrease in price, but this is not mentioned in the scenario given. The revenue effect and consumer price effect are not relevant to this situation.

Assume the Price of Pizza Decreases