According to the income effect, when the price of automobiles rises, people buy fewer automobiles because
A) they substitute other forms of transportation for driving.
B) the nominal amount of their paychecks is smaller.
C) the purchasing power of their income is reduced.
D) their demand for automobiles is very elastic.

Question

Quizplus · Accepted Answer

The income effect refers to the change in consumption resulting from a change in real income. When the price of automobiles rises, the purchasing power of consumers' income is reduced, leading them to buy fewer automobiles.

According to the Income Effect, When the Price of Automobiles