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JAMB Economics 1987 Question 14

Question 14

Theory of Demand

In the process of shopping, Mr. X whose salary per month does not exceed ₦ 200, finds that the price of a commodity he used to purchase with a fixed amount of ₦200 has now risen to ₦230. He therefore decides not to buy this commodity at all. Mr. X is thus affected by the

  1. A.substitution effect of a price change
  2. B.income effect of a price change
  3. C.opportunity cost of a price change
  4. D.inflation effect of a price change.
Show the answer and explanation

Answer: B (income effect of a price change)

Explanation

With a fixed income of ₦200, the price rise to ₦230 reduces what his income can buy, so he can no longer afford the good. This fall in real income is the income effect.