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Question

When increase in his Real Income induces a Consumer to buy more of a Commodity whose prices has fallen, it is called -

A
Inducement Effect
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B
Substitution Effect
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C
Income Effect
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D
Utility Effect
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Solution

The correct option is C Income Effect

The income effect expresses the impact of increased purchasing power on consumption, while the substitution effect describes how consumption is impacted by changing relative income and prices. ... Some products, called inferior goods, generally decrease in consumption whenever incomes increase.


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