Question

Which phrase describes the income effect?

A. the effect of demand and supply on income earned by producers
B. the impact of price on consumers’ purchasing ability and decisions
C. the increased income earned by suppliers because of high prices
D. the impact of consumers’ income on the supply of a product

Answer 1

b the correct answer is b

Answer 2

Answer: b). the impact of price on consumers’ purchasing ability and decisions.

Step-by-step explanation:

Effect of a change in the price of good can be decomposed into income effect and substitution effect. When the price of a good falls, the consumer has some extra money left after purchasing the original bundle of goods. So, with this extra money he can buy more of the goods he likes. This is called the income effect. So, we can say that the income effect studies the impact of a price change on consumers purchasing ability and decisions.