Question 6 1 point Consider a consumer who buys only lipstic

Question 6 (1 point) Consider a consumer who buys only lipstick and nail polish with her cosmetics budget. Assume the price of lipstick decreases. Which of the following is an example of the income effect? The decrease in the price of lipstick increases the consumer\'s purchasing power, which enables the consumer to buy more of both lipstick and nail polish. The decrease in the price of lipstick makes it relatively less expensive than nail polish, so the consumer will buy more lipstick and less nail polish Because the price of lipstick decreases, the consumer will choose to buy only lipstick and no nail polish. Because the price of lipstick decreases, the consumer will choose to buy only nail polish and no lipstick.

Solution

6. Change in demand due to change in purchasing power is called Income effect.

a) The decrease in the price of lipstick increases the consumer\'s purchasing power, which enables the consumer to buy more of both lipstick and nail polish.

Decrease in the price of lipstick increases the purchasing power of consumer because remaining income of person increases. This income can be used either to buy more lipstick or nail polish.

7. The change in demand due to change in the rate of exchange is called substitution effect.

b) The decrease in the price of lipstick makes it relatively less expensive than nail polish, so the consumer will buy more lipstick and less nail polish.