For most goods, the real-income effect of a price change is
A) small because the good accounts for a small part of the consumer's budget.
B) small because the decision to buy a good depends only on the income of a consumer.
C) large because the price of the good is in terms of the currency and the income of the person is also in terms of the currency.
D) zero because the real-income effect only applies to durable goods.

Question

Quizplus · Accepted Answer

The real-income effect of a price change is small because the good accounts for a small part of the consumer's budget. The real-income effect refers to the change in the quantity demanded of a good due to a change in purchasing power resulting from a change in the price of the good. However, if the good accounts for a small part of the consumer's budget, then the change in purchasing power would be small and therefore the real-income effect would be small as well.

For Most Goods, the Real-Income Effect of a Price Change