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The income effect of a decrease in the price of legal services (a normal good) is an

A. Increase in the quantity demanded for legal services because people feel wealthier.
B. Decrease in the quantity demanded for legal services because people have less income.
C. Increase in the quantity demanded for legal services because they are now more affordable.
D. Decrease in the quantity demanded for legal services because their perceived value has diminished.

1 Answer

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Final answer:

The income effect of a decrease in the price of legal services, a normal good, results in an increase in the quantity demanded because people feel wealthier and can afford more with the same amount of income.

Step-by-step explanation:

When the price of a normal good decreases, the consumer experiences an increase in real purchasing power which makes them feel effectively wealthier, even if their actual income has not changed. As a result, consumers can afford to buy more legal services than before the price decrease. This increased demand due to the consumer's higher purchasing power is known as the income effect. It is important to distinguish the income effect from the substitution effect which also causes an increase in quantity demanded. The substitution effect occurs because the product is now relatively cheaper compared to other goods, leading consumers to substitute away from these other goods and towards the now cheaper legal services.

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User Orelus
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