The income effect of an increase in the price of backpacks, a normal good, is a(n) _____

Question

Quizplus · Accepted Answer

With an increase in the price of backpacks, consumers will have a reduced purchasing power for backpacks, which will lead to a decrease in the quantity of backpacks demanded (movement along the demand curve). This is known as the income effect, which is the change in the quantity demanded of a good as a result of a change in consumer's income after accounting for the change in the price of the good. Option A is incorrect because the demand for backpacks is still normal and is not affected by a price increase. Option C and E are incorrect because they suggest that the supply side has been affected, while the question asked about the income effect which is a demand-side issue. Option D is incorrect because it failed to take into account the income effect that leads to a decrease in quantity demanded rather than an increase.

The Income Effect of an Increase in the Price of Backpacks