The real-income effect is typically small because
A) the change in price of one particular item has little effect on total purchasing power.
B) income has no relation to consumption.
C) price changes tend to balance out over time.
D) real-incomes are always rising.

Question

Quizplus · Accepted Answer

The real-income effect refers to the change in purchasing power due to a change in price. However, the effect is typically small because the change in price of one particular item has little effect on total purchasing power. This is because consumers have a limited budget, and changes in the price of one item may be offset by changes in the price of others. Therefore, the real-income effect is usually minimal.

The Real-Income Effect Is Typically Small Because