The income effect of an increase in the price of salmon
A)is the change in the demand for salmon when income increases.
B)refers to the relative price effect-salmon is more expensive compared to other types of fish-which causes the consumer to buy less salmon.
C)refers to the effect on a consumer's purchasing power which causes the consumer to buy less salmon, holding all other factors constant.
D)is the change in the demand for other types of fish, say trout, that results from a decrease in purchasing power.

Question

Quizplus · Accepted Answer

The income effect refers to the change in a consumer's purchasing power when the price of a good increases, while holding all other factors constant. This decrease in purchasing power leads to a decrease in the quantity demanded of the good, in this case, salmon. Therefore, choice C is the correct answer. Choice A refers to the income elasticity of demand, choice B refers to the substitution effect, and choice D is unrelated to the question.

The Income Effect of an Increase in the Price of Salmon