The income effect shows that when the price of a good decreases
A) income effectively rises and quantity demanded increases.
B) income effectively decreases and quantity demanded decreases.
C) people switch to more expensive goods.
D) people switch to less expensive goods.

Question

Quizplus · Accepted Answer

When the price of a good decreases, consumers feel as though their income has effectively increased because they can now buy more of the good (or others) with the same amount of money, leading to an increase in the quantity demanded of the good. This is known as the income effect.

The Income Effect Shows That When the Price of a Good