Question

Suppose Lois usually buys two cups of coffee for two dollars each and one scone for two dollars each. If the price of scones falls to one dollar each and she now buys two cups of coffee and two scones, this illustrates the:_______.

A) total utility effect.
B) marginal rate of substitution.
C) substitution effect.
D) real-income effect.

Answer 1

The correct answer is D. Real income effect.

Step-by-step explanation:

Real income is defined as the monetary income of an individual, taking into account the effect of inflation. For example, if a person's nominal salary increases by 10% in one year, and inflation is 6% in that year, the actual income will have increased 4% in that year.