The real-income effect
A) occurs when utility declines as consumption increases.
B) is the additional satisfaction derived from consuming one more unit of a good or service.
C) is the combination of goods and services that maximizes utility for a given income.
D) occurs when a consumer buys more of a good as a result of a relative price change.
E) occurs when there is a change in purchasing power as a result of a change in the price of a good.

Question

Quizplus · Accepted Answer

The real-income effect occurs when there is a change in purchasing power as a result of a change in the price of a good. For example, if the price of a good decreases, a consumer's purchasing power increases and they can afford to purchase more of that good, resulting in an increase in the quantity demanded. Conversely, if the price of a good increases, a consumer's purchasing power decreases and they can afford to purchase less of that good, resulting in a decrease in the quantity demanded.

The Real-Income Effect