Question

If Fatima used to spend her entire $130 on certain quantities and the price of bagels decreases, what can be said about the income effect?

(a) Income effect is not affected.
(b) Income effect is decreased.
(c) Income effect is increased.

Answer 1

The income effect is increased when the price of bagels decreases, as Fatima's buying power increases.

Step-by-step explanation:

The income effect refers to the change in the effective buying power of one's income when the price of a good changes. In this case, as the price of bagels decreases, Fatima's buying power increases. Therefore, the income effect is increased. With a lower price, Fatima can purchase more bagels with the same amount of income.