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

Question

Quizplus · Accepted Answer

The decrease in quantity purchased due to a price increase is an example of the substitution effect, but the decrease in real income and resulting decrease in quantity purchased is the income effect. Therefore, the correct choice is A.

Assume the Price of Good X Increases