The income effect is the effect that a change in the:

• A. consumer's preferences has on the market equilibrium
• B. consumer's income has on the quantity demanded of a good
• C. price of a good has on the quantity supplied
• D. price of a good has on the quantity demanded due to a change in purchasing power

Answer: (B)

Verified step by step guidance

1. Understand that the income effect refers to how a change in a consumer's real income (or purchasing power) affects the quantity demanded of a good.
2. Recognize that when the price of a good changes, it can alter the consumer's effective income, allowing them to buy more or less of that good, which is the essence of the income effect.
3. Distinguish the income effect from the substitution effect, which is the change in quantity demanded due to a change in relative prices, holding utility constant.
4. Note that the income effect specifically focuses on the impact of changes in purchasing power or income on demand, not on supply or preferences directly.
5. Therefore, the correct interpretation of the income effect is: the effect that a change in the consumer's income (or purchasing power) has on the quantity demanded of a good.