Suppose that you buy a lot of music and that the prices of CDs go up.The income effect means that you buy __________ CDs because ___________.
A) fewer; your nominal income has been reduced
B) fewer; your real income has been reduced
C) fewer; you now enjoy music less
D) fewer; CDs are less expensive relative to other goods

Question

Quizplus · Accepted Answer

The income effect refers to the impact of changes in income on consumer behavior. If the price of CDs goes up, it means that the consumer's real income has been reduced, as they have to spend more money on CDs than they did before. This reduction in real income will lead to a decrease in the quantity demanded of CDs, as the consumer will be less able to afford them. Therefore, the correct answer is B.

Suppose That You Buy a Lot of Music and That