Question

As price falls along a downward sloping ordinary demand curve (in the x1, p1 plane), consumer utility will: a. rise if the income effect is LESS than the substitution effect. b. fall if the income effect is GREATER than the substitution effect. c. rise if the income effect is GREATER than the substitution effect. d. rise if the income effect is LESS than the substitution effect.

Answer 1

c. rise if the income effect is GREATER than the substitution effect.

Step-by-step explanation:

If te price of a good or service falls along a downward sloping ordinary demand curve, the utility of the consumer will rise if the income effect is greater than the substitution effect, because the income effect will result in a higher purchasing power for the consumer, meaning that he or she will be able to buy more of that good or service.

The substitution effect would take place if the customer opted out for another good or service, but in this case, is not that likely because consumers tend to prefer cheaper goods and services, and the price of the good or service analyzed here has fallen, not risen.