The real-income and the substitution effects reinforce each other by
A) increasing the consumption of good B when the price of A falls.
B) increasing the consumption of both goods A and B when income increases.
C) decreasing the consumption of good A when the price of good B falls.
D) decreasing the consumption of good A when the price of good A increases.

Question

Quizplus · Accepted Answer

When the price of good A increases, the substitution effect leads consumers to buy less of good A and more of other goods. The real-income effect also leads to buying less of good A because the consumer's purchasing power has decreased. Both effects reinforce each other, resulting in decreased consumption of good A.

The Real-Income and the Substitution Effects Reinforce Each Other by