Assume that Tonya consumes only two products, pizza and potato chips, out of a given budget. Both are normal goods for Tonya. If the price of pizza decreases, then Tonya's consumption of pizza will
A) decrease due to the income effect.
B) decrease due to the substitution effect.
C) increase due to the income effect.
D) increase due to the law of diminishing marginal utility.

Question

Quizplus · Accepted Answer

When the price of pizza decreases, Tonya's purchasing power increases, which means she can now afford to buy more of both pizza and potato chips. This is known as the income effect. Since pizza is a normal good, Tonya will increase her consumption of pizza due to the income effect. The substitution effect would only come into play if the price of potato chips changed, not the price of pizza. The law of diminishing marginal utility is not relevant to this scenario.

Assume That Tonya Consumes Only Two Products, Pizza and Potato