Question

If Tino responds to a sharp increase in his transportation costs by buying fewer clothes, he is demonstrating? a.horizontal demand.b.an individual demand schedulec.the income effect.d.the substitution effect.

Answer 1

Tino's reduction in clothes purchasing due to higher transportation costs is an example of the income effect, where increased prices reduce buying power and alter consumption habits of normal goods.

Step-by-step explanation:

When Tino responds to a sharp increase in his transportation costs by buying fewer clothes, he is demonstrating the income effect.

This economic concept occurs when a rise in prices leads to a decline in the purchasing power of income, causing consumers to buy less of a normal good, despite their actual income not changing.

In Tino's case, the increased transportation costs absorb more of his budget, reducing his ability to purchase clothes at previous quantities, indicating a negative income effect on his consumption of clothes.