The income-effect:
A)isolates the effect of a change in the relative price structure on the demand of the given commodity.
B)is the sole cause of the increase in quantity demanded when the price of a good falls.
C)is identical to the substitution effect for most goods.
D)is the change in the quantity demanded of the given commodity due to a change in real income.
E)is none of the above.

Question

Quizplus · Accepted Answer

The income-effect is the change in quantity demanded of a given commodity due to a change in real income. It is different from the substitution effect, which isolates the effect of a change in the relative price structure on the demand of the given commodity. Option A describes the substitution effect. Option B is incorrect because the increase in quantity demanded when the price of a good falls is the result of both the income and substitution effects. Option C is incorrect because the income effect is not identical to the substitution effect for most goods. Therefore, the best choice is D.

The Income-Effect