Which phrase best describes the income effect in microeconomics?

• A. A change in consumption resulting from a change in relative prices holding utility constant
• B. A change in consumption resulting from a change in purchasing power due to a change in price
• C. A change in supply resulting from an increase in production costs
• D. A change in demand caused by a shift in consumer preferences

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the concept of the income effect in microeconomics. The income effect refers to how a change in a consumer's purchasing power, due to a change in the price of a good, affects the quantity of that good consumed.
2. Step 2: Recognize that when the price of a good decreases, the consumer effectively has more real income or purchasing power, allowing them to buy more of the good (and possibly other goods). Conversely, when the price increases, the consumer's purchasing power decreases.
3. Step 3: Differentiate the income effect from the substitution effect. The substitution effect involves changes in consumption due to changes in relative prices, holding utility constant, while the income effect focuses on changes in consumption due to changes in purchasing power.
4. Step 4: Analyze the given options and identify which one correctly describes the income effect. The correct phrase should mention a change in consumption resulting from a change in purchasing power caused by a price change.
5. Step 5: Conclude that the best description of the income effect is: 'A change in consumption resulting from a change in purchasing power due to a change in price.'