When oranges increase in price, the income effect
A) decreases the consumption of oranges only if oranges are a normal good.
B) decreases the consumption of oranges only if oranges are an inferior good.
C) always increases the consumption of oranges.
D) always decreases the consumption of oranges.

Question

Quizplus · Accepted Answer

The income effect is the change in consumption due to a change in purchasing power caused by a change in price. When oranges become more expensive, consumers' purchasing power decreases, and they may choose to consume less of oranges in favor of other goods. However, this effect depends on whether oranges are a normal or inferior good. If oranges are a normal good, then the income effect will decrease the consumption of oranges as their price increases. If oranges are an inferior good, then the income effect will increase the consumption of oranges as their price increases.

When Oranges Increase in Price, the Income Effect