Increasing all prices and income in exactly the same proportion:
A)leaves equilibrium quantities consumed unchanged.
B)increases consumption of luxuries.
C)decreases consumption of necessities.
D)both B and C are correct.
E)none of the above are correct.

Question

Quizplus · Accepted Answer

When all prices and income increase in the same proportion, the relative prices of goods and services do not change, which means that the consumers' preferences and behavior will remain the same. Therefore, the quantities consumed at equilibrium will remain unchanged. There will be no increase in the consumption of luxuries or decrease in the consumption of necessities because the consumers' ability to purchase these goods remains at the same income level.

Increasing All Prices and Income in Exactly the Same Proportion