When confronted with a higher pricec consumers typically adjust their behavior Instantaneously and without hesitation
Added by David A.
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Step 1: Interpret the statement: It claims that when prices rise, consumers change their behavior instantly and without delay. Show more…
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Are consumers relatively unresponsive to changes in price?
Crystal W.
To remain in consumer optimum, a price decrease requires an increase in consumption. A price increase requires a decrease in consumption. Each change in price has a substitution effect. When the price of a good decreases, the consumer substitutes in favor of that relatively cheaper good. Each change in price also has a real-income effect. When price decreases, the consumer's real purchasing power increases, causing the consumer to purchase more of most goods. Assuming that the principle of diminishing marginal utility holds, the demand curve must slope downward. The price of water is lower than the price of diamonds because people consume more water than diamonds, which results in a higher marginal utility of water compared with the marginal utility of diamonds.
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Will a consumer spend more, or less on her consumption of a particular good when its price increases? [Hint: depends on the own-price elasticity of her demand, i.e., how responsive she is to changes in price]
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