Question

The income effect of a price change refers to the impact of a change in a. the price of a good on a consumer’s purchasing power. b. income on the price of a good. c. demand when income changes. d. the quantity demanded when income changes.

Answer 1

Suppose if the price of a good increases there would be a reduction in the real income of the people and this reduces their purchasing power. The income effect of a price change shows the impact on the purchasing power of the consumers. When the price increases the purchasing power decreases and vice versa.

Ans: a). The price of a good on a consumer's purchasing power.