Question

Natalie operates on a pretty tight budget. She is a price-conscious shopper and usually buys store or generic brands to save money. Recently, however, Natalie was given a pretty substantial raise. As such, she has altered her shopping patterns and now regularly buys more expensive, name-brand goods. This is an example of ____ (A) the substitution effect(B) the income effect(C) cross price elasticity(D) the target return effect(E) the price inelasticity coefficient

Answer 1

B is the correct answer.

Step-by-step explanation:

The income effect is the demand for goods or service which is caused by a change in the consumer's discretionary income. The increase of decrease in the price leads to the decrease or increase in the consumer's discretionary income and this, in turn, causes the increase or decrease the demand for the same or some of the other goods and services. Example: If the consumer spends half of income on bread and the price of bread decrease by half then it will increase the free money available to her which she could have spent on purchasing something else. The other effect caused by the price change is called the substitution effect.