Which of the following best describes the income effect of an increase in the price of salmon?

• A. The demand for salmon increases as its price rises, due to its status as a luxury good.
• B. Consumers substitute salmon with other types of fish because salmon has become relatively more expensive.
• C. Consumers' real income increases, allowing them to buy more salmon.
• D. Consumers feel poorer because their purchasing power decreases, leading them to buy less salmon.

Answer: (D)

Verified step by step guidance

1. Step 1: Understand the concept of the income effect. The income effect refers to how a change in the price of a good affects consumers' real purchasing power, which in turn influences the quantity demanded of that good.
2. Step 2: Recognize that when the price of salmon increases, consumers' real income or purchasing power effectively decreases because they can now afford less salmon with the same amount of money.
3. Step 3: Analyze how this decrease in real income impacts demand. Since consumers feel poorer, they tend to reduce their consumption of salmon, assuming it is a normal good.
4. Step 4: Differentiate the income effect from the substitution effect. The substitution effect occurs when consumers switch to relatively cheaper alternatives, while the income effect focuses on the change in purchasing power and overall consumption.
5. Step 5: Conclude that the income effect of an increase in the price of salmon is that consumers feel poorer and therefore buy less salmon, which matches the correct answer provided.