Which of the following effects of the price change can influence the…
2021
Which of the following effects of the price change can influence the consumer’s optimal choice?
I. The change in the relative price of a good.
II. The change in the purchasing power of a consumer.
III. Sudden reduction in the minimum support price of a commodity.
- A.
Only I
- B.
Only III
- C.
I and II
- D.
I,II and III
Attempted by 7 students.
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Correct answer: C
In consumer choice theory, a change in the price of a good affects the consumer's optimal choice through two standard effects. The substitution effect comes from the change in the relative price of the good, and the income effect comes from the change in the consumer's real purchasing power. A sudden reduction in minimum support price is a policy-related price-support issue, not one of these standard effects on the consumer's optimal choice. Therefore, statements I and II are correct.