The amount of compensation associated with the income effect of a price change is called
A) A compensating variation
B) An income effect
C) Consumer surplus
D) A subsidy

Question

Quizplus · Accepted Answer

A compensating variation is the amount of additional income required to leave consumers at the same level of utility after a price change, taking into account both the substitution and income effects. It represents the monetary compensation that consumers would be willing to accept in order to preserve their pre-price change level of utility. The income effect itself refers to the change in consumers' purchasing power resulting from a change in the good's price. Consumer surplus is the difference between the maximum amount consumers are willing to pay for a good and the actual price they pay, while a subsidy is a payment made by the government to producers or consumers to support a certain economic activity.

The Amount of Compensation Associated with the Income Effect of a Price