The value of an original painting,held as an asset,increased in value by 100 percent from 1970 to 2012.Suppose during the same period average prices in the economy rose by 150 percent.The owner of the painting,relative to those who do not own paintings,experienced a:
A) Higher real income as a result of the wealth effect.
B) Higher real income as a result of the price effect.
C) Lower real wealth as a result of the wealth effect.
D) Lower real income as a result of the income effect.

Question

Quizplus · Accepted Answer

The owner of the painting experienced a lower real wealth as a result of the wealth effect. Even though the painting increased in value by 100%, the average prices in the economy rose by a higher percentage (150%), leading to a decrease in the purchasing power of the owner's wealth. The increase in the value of the painting did not fully compensate for the increase in prices.

The Value of an Original Painting,held as an Asset,increased in Value