Manav receives Rs. 100 as his monthly pocket money. He used to spend all of it on Pokemon cards, each costing Rs. 20. After a few months, the price of Pokemon cards fell to Rs. 10, while his pocket money stayed the same at Rs. 100. What happens to Manav’s purchasing power as the price of Pokemon cards falls?
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Increases
When the price of a good falls and income stays the same, the same money buys more. So the consumer’s purchasing power increases.
At Rs. 20 a card, Manav could buy 5 cards with Rs. 100. At Rs. 10 a card, he can buy 10 cards. This rise in purchasing power is what leads to the income effect of a price change.
NCERT (2026-27): “2.4.2 Deriving a Demand Curve from Indifference Curves and Budget Constraints … The negative slope of the demand curve can also be explained in terms of the two effects namely, substitution effect and income effect that come into play when price of a commodity changes. When bananas become cheaper, the consumer maximises his utility by substituting bananas for mangoes in order to derive the same level of satisfaction of a price change, resulting in an increase in demand for bananas. … Moreover, as price of bananas drops, consumer’s purchasing power increases, which further increases demand for bananas (and mangoes). This is the income effect of a price change, resulting in further increase in demand for bananas.” |