Question

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

Answer 1

Answer:

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

Explanation:

The substitution effect refers to how changes in the price of a product or service affects our consumption of them, e.g. if the price of brand X increases too much, then we might decide to buy brand Y.

On the other hand, the income effect refers to how a change in our level changes our consumption habits, e.g. luxury goods tend to be extremely elastic, since earning more income results in much higher levels of consumption.

Since the price of the product is falling, the substitution effect is not likely to occur, instead, consumer utility might increase due to higher purchasing power, i.e. you can purchase more units spending the same amount of money.