When the price of coffee increases, Uchenna buys less coffee, but he also buys fewer magazines. What explains why Uchenna buys fewer magazines?
A) the substitution effect because the price of magazines increased relative to the price of coffee
B) the substitution effect because magazines and coffee must be substitute goods
C) the income effect because Uchenna's purchasing power decreased
D) the income effect because Uchenna's purchasing power hasn't changed

Question

Quizplus · Accepted Answer

The income effect explains Uchenna's behavior because when the price of coffee increases, Uchenna's real income or purchasing power decreases, leading him to buy fewer magazines, even though the price of magazines hasn't changed. This effect occurs because he has less disposable income to spend on other goods.

When the Price of Coffee Increases, Uchenna Buys Less Coffee