In the context of consumer surplus and willingness to pay, what does the income effect refer to?

• A. The change in quantity demanded resulting from a change in a consumer's real income due to a price change
• B. The increase in consumer surplus when the price of a good rises
• C. The change in quantity demanded resulting from a change in the price of a related good
• D. The difference between what a consumer is willing to pay and what they actually pay

Answer: (A)

Verified step by step guidance

1. Understand that the income effect relates to how a consumer's purchasing power changes when the price of a good changes.
2. Recognize that when the price of a good decreases, the consumer effectively has more real income because they can buy the same amount of the good for less money, or more of the good for the same amount of money.
3. Identify that this change in real income influences the quantity demanded of the good, independent of the substitution effect (which is the change in quantity demanded due to the relative price change between goods).
4. Formally, the income effect is the portion of the total change in quantity demanded that results from the change in the consumer's real income, holding relative prices constant.
5. Therefore, the income effect refers to the change in quantity demanded resulting from a change in a consumer's real income due to a price change.