The income effect of a price change is the effect on consumption changes as a result of a change in:
A) income when all prices change in the same proportion.
B) purchasing power caused by a change in the price of the good.
C) income caused by a change in the price of labour.
D) income sufficient to offset the effect of a price change.

Question

Quizplus · Accepted Answer

The income effect of a price change refers to the changes in consumption that result from a change in purchasing power. This means that when the price of a good changes, it will affect the amount of purchasing power a consumer has, which will in turn influence their consumption choices. As such, the income effect is not related to changes in income or prices of unrelated goods, but rather the impact of changes in the price of a specific good on the amount that consumers are willing and able to buy.

The Income Effect of a Price Change Is the Effect