If the price of a good increases, all else equal, consumers perceive
A)an increase in purchasing power if the good is an inferior good.
B)an increase in income if the price increase occurs for a normal good.
C)a decrease in purchasing power.
D)a net gain in purchasing power if they decrease consumption of some goods.

Question

Quizplus · Accepted Answer

If the price of a good increases, consumers' purchasing power decreases because they can buy fewer goods with the same amount of money. This is true regardless of whether the good is an inferior or normal good. Option A is incorrect because an increase in price of an inferior good makes it less attractive to consumers and they tend to switch to a better alternative. Option B is incorrect because an increase in price of a normal good does not increase consumers' income. Option D is also incorrect because decreasing consumption of some goods does not necessarily lead to a net gain in purchasing power, as the price of other goods may also increase.

If the Price of a Good Increases, All Else Equal