Answer to Question #182547 in Microeconomics for usama

Question

Explain how the income effect influences food purchases and provide some examples of the income effect that might occur when the price of food rises, and other things remain the same

Answer 1

A rise in a product’s price reduces a consumer’s disposable income, thus undermining the purchasing power and demand for other goods. For example, in 2019, consumer A earned £100 a day and spent on fruits and meat. A kilogram of meat used to cost £50 and a fruit attracted £5. Therefore, consumer A used to buy one kilogram of meat and ten fruits daily. However, in 2020, a kilogram of meat rose to £60, but the income and fruit’s price were maintained. Therefore, consumer A consumed one kilogram of meat and could only afford eight fruits. The decline of the daily fruits’ demand from ten to eight is due to the income effect. https://www.economicshelp.org/blog/glossary/income-substitution-effect/