Question

Owen saw that the price of peaches had gone down, and so he decided to buy more peaches.

Based on this information only, what does Owen's reaction reflect?
A. Owen's demand for peaches has increased.
B. Owen's quantity demanded for peaches has increased.
C. Owen has experienced an increase in income.
D. Owen observed that there has been an increase in the price of other fruit, a substitute for peaches.
E. Owen expects future price changes.

Answer 1

Owen's decision to buy more peaches due to lower prices illustrates an increase in quantity demanded for peaches, revealing the substitution and income effects in action.

Step-by-step explanation:

Owen's reaction to the price drop of peaches reflects the substitution effect and the income effect. Due to the price decrease, Owen experiences an increase in his effective buying power, known as the income effect, which enables him to purchase more peaches than before. This scenario also exhibits the substitution effect, as Owen might be substituting peaches for other more expensive fruits he would consume otherwise. The correct answer is B. Owen's quantity demanded for peaches has increased as he decides to buy more peaches due to their lower price, not because his demand for peaches has increased or due to changes in his income, prices of substitutes, or expectations of future prices.