Question

An increase in real income of a consumer induces him to buy more of a commodity whose prices have fallen. This is known as ______.

Options

• Inducement Effect

• Substitution Effect

• Income Effect

• Utility Effect

Answer 1

An increase in real income of a consumer induces him to buy more of a commodity whose prices have fallen. This is known as Income Effect.

Explanation:

A fall in price increases the consumer’s real purchasing power, which can lead to buying more of the good; this is the income effect. The substitution effect instead concerns the good becoming relatively cheaper.