The income effect isolates the change in the consumption of a good caused by the change in:
A) "real" income.
B) the relative prices of two goods.
C) consumer preferences.
D) None of the statements is correct.

Question

Quizplus · Accepted Answer

The income effect isolates the change in consumption of a good caused by the change in "real" income. "Real" income is the purchasing power of income, or income adjusted for inflation. Therefore, the income effect measures how much the quantity demanded of a good changes in response to a change in real income, holding all other factors constant.

The Income Effect Isolates the Change in the Consumption of a Good