Question : The concept of the income effect is based on changes in:
Option 1: Consumer preferences
Option 2: Consumer Income
Option 3: Consumer prices
Option 4: Consumer savings
Correct Answer: Consumer Income
Solution : The correct answer is (b) Consumer Income
The concept of the income effect is based on changes in consumer income. It refers to the impact that a change in consumer's income has on their purchasing power and their demand for goods and services.
When a consumer's income increases, their purchasing power also increases, allowing them to buy more goods and services at the given prices. This leads to an upward shift in their budget line and an expansion of their consumption possibilities.
Conversely, when a consumer's income decreases, their purchasing power decreases, resulting in a downward shift in their budget line and a contraction of their consumption possibilities.
