Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
It causes consumers to buy only luxury goods.
B
It leads consumers to adjust their consumption patterns to maximize utility within their budget.
C
It makes consumers indifferent to changes in prices.
D
It eliminates the need for budgeting altogether.
Understanding the Answer
Let's break down why this is correct
Answer
The income effect explains how a change in a consumer's income affects their purchasing decisions, particularly when considering their budget. When a consumer has a limited budget, they must choose how to spend their money to get the most satisfaction, or utility, from their purchases. As they buy more of one good, they experience diminishing marginal utility, meaning each additional unit of that good gives less satisfaction than the previous one. For example, if someone buys more slices of pizza, the first slice might taste amazing, but the fifth slice might not be as enjoyable. Therefore, if their income increases, they might buy more of both pizza and salad to maximize their overall happiness, adjusting their choices based on how much satisfaction each food provides.
Detailed Explanation
The income effect helps people change what they buy to get the most satisfaction. Other options are incorrect because Some might think that the income effect means buying only expensive things; It's a common mistake to think that price changes don’t matter.
Key Concepts
budget constraint
income effect
diminishing marginal utility
Topic
Consumer Utility Maximization
Difficulty
hard level question
Cognitive Level
understand
Ready to Master More Topics?
Join thousands of students using Seekh's interactive learning platform to excel in their studies with personalized practice and detailed explanations.