Question

The change in the optimal quantity of a good when the purchasing power changes consequent to a price change is called ________.

• A. Price effect
• B. Income effect
• C. Substitution effect
• D. None of the above

Answer 1

The correct option is B Income effect

The income effect expresses the impact of increased purchasing power on consumption, while the substitution effect describes how consumption is impacted by changing relative income and prices. ... Some products, called inferior goods, generally decrease in the consumption whenever incomes increase. Income effect shows this reaction of the consumer. ... Thus, the income effect means the change in consumer's purchases of the goods as a result of a change in his money income.