Suppose Lois usually buys two cups of coffee for two dollars each and one scone for two dollars each. If the price of scones falls to one dollar each and she now buys two cups of coffee and two scones, this illustrates the
A) substitution effect.
B) marginal rate of substitution.
C) total utility effect.
D) real-income effect.

Question

Quizplus · Accepted Answer

The real-income effect occurs when a change in the price of a good affects the consumer's purchasing power, allowing them to buy more of the good or other goods. Here, the price drop in scones increases Lois's real income, enabling her to buy more scones.

Suppose Lois Usually Buys Two Cups of Coffee for Two