For goods on which a relatively small portion of income is expended,_____.
A)income effects will be small relative to substitution effects
B)income effects will be large relative to substitution effects
C)income effects will be about the same as substitution effects
D)there will be no income effects.

Question

Quizplus · Accepted Answer

When a relatively small portion of income is expended on a good, the income effect is likely to be small in comparison to substitution effect. This is because the increase or decrease in income has a small impact on the amount of the good consumed, while the price changes of the good have a bigger impact on the amount consumed. Hence, the substitution effect will play a bigger role in determining the changes in consumption of the good compared to income effect.

For Goods on Which a Relatively Small Portion of Income