With a fall in the price of a commodity, consumer's real income:

Question

Accepted Answer

The correct option is 2:

To understand this concept, we must differentiate between nominal income and real income. Nominal income refers to the money income earned by the consumer (e.g., their salary), which remains constant in this scenario. Real income, however, refers to the purchasing power of that nominal income—that is, the quantity of goods and services a consumer can buy with their money income. When the price of a commodity falls, the consumer needs less money to purchase the same amount of that good as before. Effectively, the consumer's fixed nominal income can now buy more of that commodity (and potentially more of other goods if the savings are redirected), meaning their purchasing power has gone up. This increase in purchasing power due to a price fall is known as the income effect, and it directly translates to an increase in the consumer's real income.

The incorrect option is 1: Decreases.
A consumer’s real income would decrease only if the price of a commodity increases (assuming nominal income is constant). A price increase would erode purchasing power, forcing the consumer to buy less of the goods they previously afforded.

The incorrect option is 3: No changes.
Real income is defined by purchasing power, which is inherently volatile and changes with price levels. Real income would only remain unchanged if nominal income changed proportionally to the price change, or if the price change was zero, neither of which is the case here.

The incorrect option is 4: None of the above.
Since the price fall unequivocally leads to an increase in purchasing power, option 2 is correct, making "None of the above" incorrect.