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

Question

Quizplus · Accepted Answer

The income effect 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 the price of a good changes, the consumer's purchasing power changes, leading to a change in their real income. The income effect takes into account the fact that consumers may change their consumption of a good in response to changes in their purchasing power. The substitution effect, on the other hand, refers to the change in quantity demanded that occurs as a result of a change in relative prices, with real income held constant. This means that when the price of a good changes relative to the price of another good, it may become relatively more or less expensive, leading consumers to change their consumption patterns. Together, these two effects help to explain how consumers react to changes in prices in the market.

Consider the Income and Substitution Effects of Price Changes