Question

The definition of income effect is best defined as: ___________. Select the correct answer below: The state in which the ratio of the prices of goods is equal to the ratio of the marginal utilities. The idea that consumers replace costly goods with more affordable goods as prices change. The idea that a higher price means the buying power of income has been reduced. A decision to consume a specific combination of goods to optimize satisfaction.

Answer 1

Answer:

The idea that a higher price means the buying power of income has been reduced.

Explanation:

The income effect is defined as the change in consumption of goods of services after a change of income. If income grows, it is expected that the consumption of goods and services will also grow (this can be measured by the marginal propensity to consume), and viceversa.

If prices rise, the buying power of income will be reduced even if income has grown. If prices rises even more than income, the buying effect of income will fall even more. This two statements can be both explained by the income effect concept.