The income effect of an increase in the price of computers may include all of the following except a decrease in
A)the number of computers the consumer will purchase.
B)other goods that the consumer will purchase.
C)the consumer's actual, or nominal, budget.
D)the consumer's real income.
E)most goods that the consumer will purchase.

Question

Quizplus · Accepted Answer

The income effect refers to the change in purchasing power resulting from a change in price. When the price of computers increases, the consumer's actual (nominal) budget remains the same, but their purchasing power or real income decreases. This can result in a decrease in the number of computers the consumer will purchase (A) and may cause them to adjust their spending on other goods (B) as they have less disposable income. Therefore, the correct answer is (C) as the nominal budget does not change, only the real purchasing power is affected. The income effect may also impact the purchasing of most goods (E), not just computers.

The Income Effect of an Increase in the Price of Computers