Suppose and the price of X is 1,the price of Y is 1 and income is $12.If the price of X increases to 2,the income effect (in terms of units of X bought)is
A) 2
B) -1
C) 0
D) -2

Question

Suppose  and the price of X is 1,the price of Y is 1 and income is $12.If the price of X increases to 2,the income effect (in terms of units of X bought)is
A) 2 
B) -1 
C) 0 
D) -2

Quizplus · Accepted Answer

Initially, with a price of X at 1 and income at $12, the consumer buys $6 worth of X (since X and Y are priced the same, the consumer spends half of their income on X). 
When the price of X increases to 2 and income remains at $12, the consumer can only purchase $3 worth of X. This is due to the fact that the consumer can now only afford to purchase half as much X as before. 
Therefore, the income effect (in terms of units of X bought) is -3 (since the consumer is now purchasing 3 units less of X than before). 
Thus, the best choice is D.

Suppose and the Price of X Is 1,the Price