Final answer:
The target income hypothesis is linked to pricing strategies and desired income levels, relating to the income effect which describes how higher wages can increase one's utility level and consumption preferences, as depicted in a movement from point C to B on a budget constraint diagram.
Step-by-step explanation:
The target income hypothesis is a concept that suggests a service provider will adjust their pricing strategy to achieve a certain desired income level.
This hypothesis is related to the broader idea of the income effect, which describes how changes in income can affect an individual's consumption patterns.
In the context provided, the income effect explains how a shift in the labor-leisure budget constraint to the right, due to a higher wage, allows someone like Petunia to achieve a higher utility level without changing the wage rate.
This is seen as a movement from point C to point B. The income effect influences Petunia's tendency to enjoy more leisure and earn more income, exemplified by the arrows on the horizontal and vertical axes.
Conversely, if prices increase and reduce buying power, the consumption of normal goods typically decreases, this movement from a higher to a lower indifference curve, while holding relative prices constant, is illustrated from point C to B and is indicated by arrows labeled 'i' for income effect.