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The real-income effect shows that

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The real-income effect shows that

Question 1.

Use the above table. Adam has 3 apples and 3 oranges. Eve has 2 apples and 2 oranges. Eve asks Adam to give her an apple in exchange for an orange. Should Eve go through with this exchange?

• No. Adam likes apples more than oranges.

• Yes. She is indifferent between consuming apples and oranges.

• No. She gives up more satisfaction than she gets.

• Yes. This way she will have 3 apples, which will give her more total satisfaction.

Question 2.

The real-income effect shows that

• if the consumer's income rises, he or she buys more of inferior goods and less of normal goods.

• a decrease in the price of a good increases the purchasing power of the consumer's income.

• if a good is inferior, a decrease in the purchasing power of income results in less of the good being consumed.

• when the price of a good rises, consumers are able to buy more of other goods because of the increase in the purchasing power of income.

Textbook

Economics Today: The Micro View

Edition: 19^th

Author: Miller

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