Question

Look at the chart. Which scenario best reflects the income effect? (item and price chart) A. Ian responds to a rise in the price of clothes by cutting back on all of his purchases. B. Holly responds to a rise in the price of fruit by buying less fruit but more vegetables. C. Jed responds to an increase in the price of school lunches by feeling able to purchase more in other areas. D. Noemi responds to a rise in the price of food by increasing her purchases before further price increases.

Answer 1

The best scenario reflecting the income effect is when Ian cuts back on all purchases due to a rise in the price of clothes, indicating that his buying power has decreased.

Step-by-step explanation:

The scenario that best reflects the income effect is A. Ian responds to a rise in the price of clothes by cutting back on all of his purchases. This reflects the income effect because an increase in the price of clothes reduces Ian's effective buying power, meaning that, even though his actual income hasn't changed, he feels as though he has less money to spend on all types of goods.

The income effect occurs when a change in the price of a good affects the consumer's ability to purchase other goods with the same income. Conversely, the substitution effect occurs when consumers replace a more expensive good with a less costly alternative, which is not the scenario described by Ian's reaction.

Answer 2

The best scenario that reflects the income effect is option C. Jed responds to an increase in the price of school lunches by feeling able to purchase more in other areas.

Step-by-step explanation:

The best scenario that reflects the income effect is option C. Jed responds to an increase in the price of school lunches by feeling able to purchase more in other areas. The income effect refers to how a change in the price of a good alters the effective buying power of one's income. In this scenario, Jed's income remains the same while the price of school lunches increases. As a result, he feels that he has more buying power in other areas and is able to purchase more.