Which statement BEST describes the income effect of a price increase?
A)The price of bacon increases,so Michelle buys more sausage.
B)The price of corn chips increases,so Michelle buys potato chips.
C)The tuition at the public university increases,so Michelle attends a community college.
D)Michelle's apartment rent increases,so she cancels her subscription to a monthly magazine.

Question

Quizplus · Accepted Answer

The income effect refers to the change in a consumer's purchasing behavior as a result of a change in their income due to a price increase. If the price of a good/service increases, the consumer will have less money available to spend on other items. In this scenario, Michelle's apartment rent has increased, which means she has less money to spend on other things. Therefore, she cancels her subscription to a monthly magazine to free up some extra income.

Which Statement BEST Describes the Income Effect of a Price