Which of the following correctly describes the income effect associated with the law of demand?

• A. When the price of a good decreases, consumers substitute the good with other goods, increasing its quantity demanded.
• B. When the price of a good decreases, consumer surplus decreases.
• C. When the price of a good decreases, consumers feel as though their real income has increased, allowing them to purchase more of the good.
• D. When the price of a good increases, consumers' willingness to pay for the good rises.

Answer: (C)

Verified step by step guidance

1. Step 1: Understand the law of demand, which states that, ceteris paribus, when the price of a good decreases, the quantity demanded of that good increases.
2. Step 2: Recognize that the total effect of a price change on quantity demanded can be decomposed into two parts: the substitution effect and the income effect.
3. Step 3: The substitution effect occurs when consumers replace a good with a cheaper alternative as its price changes, holding real income constant.
4. Step 4: The income effect occurs because a change in the price of a good effectively changes the consumer's real purchasing power or 'real income.' When the price decreases, consumers feel richer and can afford to buy more of the good.
5. Step 5: Therefore, the income effect associated with the law of demand is correctly described as: when the price of a good decreases, consumers feel as though their real income has increased, allowing them to purchase more of the good.