The income effect of a price change refers to
A)the change in demand that occurs when consumer income changes.
B)the change in the quantity demanded that results from a change in price, making the good more or less expensive relative to other goods, holding everything else constant.
C)the change in demand that occurs when both income and price change.
D)the change in the quantity demanded of a good that results from the effect of a change in price on consumer purchasing power, holding everything else constant.

Question

Quizplus · Accepted Answer

The income effect of a price change refers to the impact of a change in price on the purchasing power of consumers. When the price of a good increases, consumers may have to reduce their consumption of that good because the same amount of money can now buy fewer goods overall. This decrease in quantity demanded is known as the income effect. Therefore, the correct choice is D.

The Income Effect of a Price Change Refers to