Final answer:
An understated B/I due to a negative income effect means that consumers will typically buy less of every normal good, potentially reducing COGS as businesses may produce or order fewer goods to meet the decreased demand, although this is an indirect effect.
Step-by-step explanation:
If E/I is understated, then B/I is understated implies that if expenses relative to income are understated, then benefits relative to income will also be understated. This scenario involves understanding the income effect and the substitution effect, which are key concepts in microeconomics involving consumer choice and demand. When a negative income effect occurs, such as due to a decrease in monthly income because a check did not arrive, consumers will buy less of every normal good because their budget constraint shifts inward towards the origin. If we relate this to the cost of goods sold (COGS), an understatement in benefit relative to income would suggest that there could be an understatement in the consumption of goods, and hence COGS could be affected accordingly. With a decrease in consumption, COGS might decrease as businesses order or produce fewer goods to meet the reduced demand. However, this does not directly adjust COGS, which is a measure of the direct costs attributable to the production of the goods sold by a company. Instead, it impacts the demand and quantity sold, which could in turn influence COGS indirectly.