When the price of a good changes,the income effect can be found by comparing the equilibrium quantities purchased
A) on the old budget line and the new budget line.
B) on the original indifference curve when faced with the original prices and when faced with the new prices.
C) on the new budget line and a hypothetical budget line that is a shift back to the original indifference curve parallel to the new budget line.
D) on the new indifference curve.

Question

Quizplus · Accepted Answer

The income effect shows how a change in price affects the quantity demanded of a good while holding real income constant. To isolate the income effect, we need to hold the consumer's purchasing power constant. One way to do this is to compare the quantities purchased on the new budget line with a hypothetical budget line that is a shift back to the original indifference curve parallel to the new budget line. This hypothetical budget line represents the purchasing power that the consumer had before the price change. By comparing the quantities purchased on these two budget lines, we can see the effect of the price change on the consumer's purchasing behavior, holding real income constant.

When the Price of a Good Changes,the Income Effect Can