The income effect is:
A)the change in utility caused by a price change
B)represented by a parallel shift of the budget constraint
C)the result of a change in nominal income
D)the change in real income caused by a price change

Question

Quizplus · Accepted Answer

The income effect refers to the change in real income caused by a price change. It occurs when the consumer adjusts their consumption patterns in response to the change in the purchasing power of their income. A decrease in the price of a good will increase the consumer's purchasing power, leading them to buy more of the good (assuming it is a normal good), resulting in a positive income effect. Conversely, an increase in the price of a good will decrease the consumer's purchasing power, leading them to buy less of the good, resulting in a negative income effect.

The Income Effect Is