The change in people's purchasing power that occurs when the price of one good that they purchase changes is the
A) law of diminishing marginal utility.
B) real-income effect.
C) substitution effect.
D) price income effect.

Question

Quizplus · Accepted Answer

The real-income effect refers to the change in purchasing power that occurs when the price of a good changes. As the price of a good increases, the consumer's real income decreases, and they may not be able to afford the same quantity of the good or may have to reduce their consumption of other goods. This effect is distinct from the substitution effect, which refers to the change in the quantity demanded of a good due to a change in its relative price. The law of diminishing marginal utility and price income effect are not directly related to changes in purchasing power due to price changes.

The Change in People's Purchasing Power That Occurs When the Price