Explanation The consumer’s income is the amount of goods and services that the consumer can purchase with his budget. Option (a): When there is a decline in the price of a commodity the consumer consumes, he now has to pay less to get the commodity. Then his disposable income increases and he can use the excess income to make the demand for the same commodity or the other. This can be numerically explained as follows: When the budget is $6 and the prices of goods A and B are $1 and $2, respectively. Now, the consumer can consume either 6 units of A or 3 units of B or 2 units of both A and B. When the price of ‘B’ decreases to $1, the consumer can consume either 6 units of each ‘A or B only’ or a combined quantity of 3 units of A and B. Thus, this denotes that the income of the consumer has increased...

Income effect. | bartleby

ECO 2020 INCLUSIVE ACCESS

21st Edition

ISBN: 9781260564617

Author: McConnell

Publisher: MCGRAW-HILL HIGHER EDUCATION

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