Suppose the price of a good rises. The income effect
A) is shown by increasing income at the new relative price in order to move from the old indifference curve to the new indifference curve after the price change.
B) shows the change in consumption that results from the change in relative price while keeping income constant.
C) is shown by decreasing income at the new relative price in order to move from the old indifference curve to the new indifference curve after the price change.
D) shows the change in consumption that results from the change in relative price while staying on the same indifference curve.

Question

Quizplus · Accepted Answer

The income effect is shown by decreasing income at the new relative price to move from the old indifference curve to the new one after the price change, reflecting the change in purchasing power.

Suppose the Price of a Good Rises