The income effect refers to the change in quantity demanded that occurs as a result of a change in
A) real income, with relative prices held constant.
B) preferences, with real income held constant.
C) marginal utility, with real income held constant.
D) money income, with relative prices held constant.
E) relative prices, with real income held constant.

Question

Quizplus · Accepted Answer

The income effect specifically refers to the change in quantity demanded that occurs as a result of a change in real income, with relative prices held constant. This means that when a consumer's real income changes (either increases or decreases), their purchasing power changes and they may choose to purchase more or less of a good or service. The income effect is one of two effects that occur when the price of a good or service changes, the other being the substitution effect.

The Income Effect Refers to the Change in Quantity Demanded