What is the income effect of an increase in the price of peaches?
A)The change in the quantity demanded of peaches that results from the price increase making peaches more expensive than other fruit, holding constant the effect of the price change on consumer purchasing power.
B)The change in the demand for peaches as a result of the change in the price of peaches, holding all other factors constant.
C)The change in the quantity demanded of other fruit that results from the impact of the price change on purchasing power, holding all other factors constant.
D)The change in the quantity demanded of peaches that results from the effect of the change in price on consumer purchasing power, holding all other factors constant.

Question

Quizplus · Accepted Answer

Income effect refers to the change in the quantity demanded of a good due to a change in purchasing power resulting from a change in the price of the good. In this case, an increase in the price of peaches would reduce the purchasing power of consumers since they would have to spend more on peaches. As a result, consumers would demand less of peaches, assuming all other factors remain constant. Therefore, the income effect of an increase in the price of peaches is the change in the quantity demanded of peaches that results from the effect of the change in price on consumer purchasing power, holding all other factors constant. Option D is the correct choice.

What Is the Income Effect of an Increase in the Price