Consider the income and substitution effects of price changes.For a product with an income elasticity greater than one,a price increase will cause the consumer's real income to
A)rise and the quantity purchased to fall.
B)fall and the quantity purchased to fall.
C)rise and the quantity purchased to rise.
D)fall and the quantity purchased to rise.
E)remain constant.

Question

Quizplus · Accepted Answer

For a product with an income elasticity greater than one, a price increase will decrease the quantity demanded. However, since the good is considered a normal good (income elasticity greater than 0), the consumer's real income will decrease as well. The decrease in real income will result in a decrease in the quantity demanded. Therefore, both the income and substitution effects lead to a decrease in the quantity demanded in response to a price increase.

Consider the Income and Substitution Effects of Price Changes