Multiple Choice
Which of the following is NOT an example of a price in the context of consumer surplus and willingness to pay?
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5. Consumer and Producer Surplus; Price Ceilings and Floors
Consumer Surplus and Willingness to Pay
Multiple Choice
Which of the following correctly describes the income effect associated with the law of demand?
A
When the price of a good decreases, consumers substitute the good with other goods, increasing its quantity demanded.
B
When the price of a good decreases, consumer surplus decreases.
C
When the price of a good decreases, consumers feel as though their real income has increased, allowing them to purchase more of the good.
D
When the price of a good increases, consumers' willingness to pay for the good rises.
Verified step by step guidance1
Step 1: Understand the law of demand, which states that, ceteris paribus, when the price of a good decreases, the quantity demanded of that good increases.
Step 2: Recognize that the total effect of a price change on quantity demanded can be decomposed into two parts: the substitution effect and the income effect.
Step 3: The substitution effect occurs when consumers replace a good with a cheaper alternative as its price changes, holding real income constant.
Step 4: The income effect occurs because a change in the price of a good effectively changes the consumer's real purchasing power or 'real income.' When the price decreases, consumers feel richer and can afford to buy more of the good.
Step 5: Therefore, the income effect associated with the law of demand is correctly described as: when the price of a good decreases, consumers feel as though their real income has increased, allowing them to purchase more of the good.
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