The income effect of a price change is the effect on consumption changes as a result of a change in:
A)income when all prices change in the same proportion.
B)purchasing power caused by a change in the price of the good.
C)income caused by a change in the price of labor.
D)income sufficient to offset the effect of a price change.

Question

Quizplus · Accepted Answer

The income effect of a price change is the effect on consumption changes as a result of a change in purchasing power caused by a change in the price of the good. When the price of a good decreases, the purchasing power of consumers increases, which leads to increased consumption of the good, and vice versa. The income effect is separate from the substitution effect, which measures the effect of a price change on the relative attractiveness of consuming one good over another.

The Income Effect of a Price Change Is the Effect