Which of the following occurs simultaneously with an income effect?

Question

BlackTom AI · Accepted Answer

The question asks about what happens simultaneously with an income effect when a price changes.
First, recall the two components of the total effect of a price change on quantity demanded: the substitution effect, which arises from the change in relative prices and makes the consumer substitute toward relatively cheaper goods, and the income (or wealth) effect, which results from the change in the consumer’s purchasing power due to the price change.
Second, when a price changes (for example, a good becomes cheaper), both effects operate at the same time: the consumer re-optimizes consumption due to the new relative prices (substitution effect), and at the same time the real purchasing power changes, which can lead to an increase or decrease in quantity demanded depending on the good (income effect).
Third, the substitution effect is the portion of the total change in quantity demanded that would occur even if the consumer were kept at the same utility level (i.e., if real income were held constant). The income effect is the portion due to the change in real purchasing power. Since the question asks which occurs simultaneously with the income effect, the correct understanding is that the substitution effect occurs at the same time as the income effect when the price changes.
Finally, this interplay is fundamental in analyzing demand curves: the total change in quantity demanded equals the sum of the substitution effect and the income effect, with the substitution effect typically pointing in the same direction as the price change for normal goods and the income effect depending on whether the good is normal or inferior.

ECON 203-0001 Exam 2

Which of the following occurs simultaneously with an income effect?

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