Answer to Question #34919 in Microeconomics for Terrence

Question

How does the income effect influence consumer behavior when prices rise?

Answer 1

The income effect is increase in consumption of the normal benefits as a result of the fall in its price due to the increase in real income caused by the reduction in price, and vice versa, reduction of the consumption of normal benefits as a result of its increase in price by reducing the real income caused by rising prices. If the buyer is able to choose between the two products, he will buy more of the goods, relative price of which has fallen, and less of the relative price of which has increased. As a result, when the price of A good increases in relation to the price of B good and at the same time the real income remains fixed, then the consumer will purchase fewer part of A goods and more of B ones.