GK
BUSINESS ECONOMICS
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Price effect in indifference curve analysis arises
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When income and price change
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When the consumer is betler off due to a change in income and price
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When the consumer becomes either better off or worse off because price change is not compensated by income change
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None of the above
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Explanation:
Detailed explanation-1: -The income effect causes indifference curves to move up or down. If the price of the good decreases, our real income increases, and the indifference curve will move upwards and vice versa. The substitution effect occurs due to a decrease in the price of one good while the other good’s price remains the same.
Detailed explanation-2: -The price effect is viewed as a combination of income and substitution effects. The substitution effect always works in one direction. A consumer is always induced to buy more units of a cheaper good.
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