Which of the following occurs simultaneously with an income effect?

Question

BlackTom AI · Accepted Answer

The question asks: Which of the following occurs simultaneously with an income effect? 
Since the answer options provided are not listed, I will first acknowledge the given answer field indicates 'substitution effect' as the intended correct choice. 
In consumer theory, when the price of a good changes, two decomposed effects are at play: the substitution effect and the income effect. The substitution effect captures the change in quantity demanded due to the change in relative prices, holding the consumer's utility (or real income in terms of purchasing power) constant. The income effect captures the change in quantity demanded due to the change in purchasing power caused by the price change. These two effects are analyzed together for a given price change because they both arise from the same price change in the market and together explain the total change in quantity demanded. 
Option: substitution effect. This is correct in the sense that the substitution effect accompanies the income effect during a price change; it represents how consumers substitute toward relatively cheaper goods as prices shift, while the income effect reflects the change in real purchasing power. 
If there had been other options, we would contrast them as follows: an option claiming only the income effect would be incomplete, because the price change inherently generates both effects; an option suggesting no effect or a completely different mechanism would ignore the standard decomposition of a price-change event into two simultaneous components. 
Overall, the key concept is that the substitution effect occurs in tandem with the income effect when a price change occurs, and together they determine the total change in quantity demanded.

ECON 203-0001 Chapter 6

Which of the following occurs simultaneously with an income effect?

View Explanation

Log in for full answers

Similar Questions

Sarah usually buys 5 cups of coffee and 2 muffins every day. The price of coffee falls significantly. Explain how the substitution effect and the income effect influence Sarah’s decision to buy more coffee.

For Sarah, meals at McDonald’s are an inferior good. When the price of meals at McDonald’s increases, Sarah buys less McDonald’s meals. This means that:

If a good is normal and its price increases,

Rose is allocating her budget between two goods—Apples and Bananas; both are normal goods. If the price of apples increases from $1 per pound to $2 per pound, then the income effect causes her to buy _of apples and the substitution effect causes her to buy_ of apples.

The effect of a change in relative price on consumer choice can be divided into: