Suppose the price of apples rises making oranges relatively less expensive. The increase in orange consumption as a result of the price change is an example of the income effect.

Question

Quizplus · Accepted Answer

The increase in orange consumption as a result of the price change is an example of the substitution effect, not the income effect. The income effect refers to the change in demand due to a change in income, while the substitution effect refers to the change in demand for one good due to a change in the price of a related good.

Suppose the Price of Apples Rises Making Oranges Relatively Less