Asked by Logan MacNeil on Jun 30, 2024
Verified
Housing is a normal good that tends to take up a substantial share of a consumer's spending.An increase in the price of housing will result in:
A) both an income and substitution effect to decrease the quantity demanded of housing.
B) both an income and substitution effect to increase the quantity demanded of housing.
C) the income effect of increasing the quantity demanded of housing and the substitution effect of decreasing the quantity demanded of housing.
D) the income effect of decreasing the quantity demanded of housing and the substitution effect of increasing the quantity demanded of housing.
Income Effect
A phenomenon where changes in an individual's income lead to changes in the quantity demanded of a good or service.
Substitution Effect
The economic principle that as the price of a good increases, consumers will replace it with less expensive alternatives.
Normal Good
A product that sees an increase in demand as people's incomes increase, and a decrease in demand when their incomes decrease.
- Gain insight into the connection between price fluctuations, the effect on income, the effect of substitution, and the demand by consumers.
- Analyze the properties of normal and inferior products in reaction to variations in income and pricing.
Verified Answer
HL
Helio LeyvaJul 02, 2024
Final Answer :
A
Explanation :
An increase in the price of housing will lead to a decrease in the quantity demanded of housing due to both income and substitution effects. The income effect will occur because the consumer's purchasing power will decrease as they will have to spend more on housing, resulting in a decrease in the quantity demanded of all goods, including housing. The substitution effect will occur because the increase in the price of housing will make other goods relatively cheaper and more attractive to consumers, encouraging them to purchase less housing.
Learning Objectives
- Gain insight into the connection between price fluctuations, the effect on income, the effect of substitution, and the demand by consumers.
- Analyze the properties of normal and inferior products in reaction to variations in income and pricing.