The real-income effect of a price change is most significant when
A) the substitution effect is insignificant.
B) the substitution effect is significant too.
C) the good under consideration constitutes a major portion of the consumer's budget.
D) the marginal utility per dollar spent on the last unit is high.

Question

Quizplus · Accepted Answer

The real-income effect of a price change is most significant when the good under consideration constitutes a major portion of the consumer's budget. This means that the change in price will have a direct impact on the consumer's purchasing power and therefore their overall spending behavior. When a significant portion of the budget is allocated to a particular good or service, changes in its price will have a noticeable effect on the consumer's real income, making them more sensitive to price changes.

The Real-Income Effect of a Price Change Is Most Significant