Q284
The total effect of a price change of a commodity is
A.
Sustitution effect plus price effect
B.
Substitution effect plus income effect
AnswerC.
Substitution effect plus demonstration effect
D.
Substitution effect minus income effect
Answer: Option B
Solution
Answer: Option B
Solution:
The total effect of a price change of a commodity is substitution effect plus income effect. The income effect is the change in consumption patterns due to a change in purchasing power. This occurs with income increases, price changes, and even currency fluctuations. Since income is not a good in and of itself (it can only be exchanged for goods and services), price decreases increase purchasing power.