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.

Question

Quizplus · Accepted Answer

When the price of good X increases, it reduces the purchasing power of the consumer and leads to a decrease in real income. This reduction in real income affects the quantity of goods purchased by the consumer, leading to a decrease in the quantity of good X purchased. This phenomenon is known as the income effect. The other options are not applicable in this scenario.

Assume the Price of Good X Increases