According to the income effect, when the price of automobiles rises, people buy fewer automobiles because a. the nominal amount of their paychecks is smaller. b. the purchasing power of their income is reduced. c. their demand for automobiles is very elastic. d. they substitute other forms of transportation for driving.

Question

Business

Cortez Arellano

25 January, 23:17

According to the income effect, when the price of automobiles rises, people buy fewer automobiles because a. the nominal amount of their paychecks is smaller. b. the purchasing power of their income is reduced. c. their demand for automobiles is very elastic. d. they substitute other forms of transportation for driving.

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Answers (2)

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German · Answer 1

B. the purchasing power of their income is reduced

Explanation:

Income effect results when there's a change in the demand for commodities caused directly as a results from changes in the consumer's purchasing power due to changes in real income of prices of the commodity. When there's an increase in the price of automobiles, the purchasing power of customers reduces as income remains constant. This is because the consumers would no longer be able to purchase goods and services in their regular amount as a results of increase in the price of those goods and services or reduction in the real income.

Andreas Osborn · Answer 2

b. the purchasing power of their income is reduced.

Explanation:

Income effect is defined as the change in demand of a product that is a result of change in purchasing power of an individual, there are changes in real income.

When there is price increase the number of goods an individual's income can buy is reduced, so his purchasing power reduces. He will demand less of the good.

When there is a reduction in price purchasing power increases and customer can demand for more of the good.

In this scenario the increase in price of automobiles results in reduction in purchasing power, and reduction in amount demanded.