Asked by Ma Michelle Sison on Jun 14, 2024
Verified
Assume that Tonya consumes only two products, pizza and potato chips, out of a given budget. If the price of pizza decreases, then Tonya's consumption of pizza will
A) decrease due to the income effect.
B) decrease due to the substitution effect.
C) increase due to the income effect.
D) increase due to the law of diminishing marginal utility.
Income Effect
Adjustments in the income of an individual or the broader economy and the consequent effects on how much of a good or service is desired.
Law of Diminishing
refers to the principle that as one consumes more of a good, the marginal utility (or satisfaction) obtained from consuming an additional unit decreases.
Substitution Effect
The substitution effect occurs when consumers replace more expensive items with less costly alternatives, influencing demand patterns as prices fluctuate.
- Acquire knowledge on the basics of how consumers behave and how they maximize their satisfaction.
- Determine the distinction between income and substitution effects when prices alter.
Verified Answer
ZK
Zybrea KnightJun 20, 2024
Final Answer :
C
Explanation :
When the price of pizza decreases, Tonya can afford to buy more pizza with the same budget, which is the income effect. This effect makes her feel as if her purchasing power has increased, allowing her to consume more of the goods she prefers, including pizza.
Learning Objectives
- Acquire knowledge on the basics of how consumers behave and how they maximize their satisfaction.
- Determine the distinction between income and substitution effects when prices alter.