When the price of ice cream rises, Juan is unable to afford as much ice cream as he used to buy. This is an example of the _____ effect.
A) income
B) utility
C) substitution
D) optimization

Question

Quizplus · Accepted Answer

The income effect occurs when a change in the price of a good affects the purchasing power of a consumer's income, leading to a change in the quantity demanded for that good. In this case, the increase in the price of ice cream reduces Juan's real income, meaning he can't afford to buy as much ice cream as before.

When the Price of Ice Cream Rises, Juan Is Unable