Polly consumes crackers and fruit.The price of fruit rose and the price of crackers stayed constant.The income effect on Polly's demand is
A)zero because Polly's income didn't change.
B)the change in Polly's demand if her income is decreased by the change in the price of fruit times her old consumption of fruit.
C)the change in Polly's demand if her income is decreased by the total amount she used to spend on fruit.
D)the change in Polly's demand if her income is increased by the amount she used to spend on fruit.
E)the change in Polly's demand if her income is increased by the change in the price of fruit times the amount she used to buy.

Question

Quizplus · Accepted Answer

The income effect refers to the change in demand caused by a change in income. In this scenario, Polly's income did not change, so choice A is incorrect. Since the price of crackers stayed constant, they are not part of the equation, so choices C, D, and E can be eliminated. The price of fruit increased, so there will be a decrease in Polly's demand for fruit, but we need to quantify this change. According to the income effect formula, the change in demand is equal to the change in price of fruit multiplied by old consumption of fruit. Therefore, the best choice is B.

Polly Consumes Crackers and Fruit