Question

Explain how the income effect can make customers feel richer and, therefore, more likely to purchase greater quantities.

a) The income effect doesn't impact customer behavior
b) The income effect leads to reduced spending
c) The income effect makes customers feel wealthier, leading to increased purchases
d) The income effect only affects the wealthy

Answer 1

The income effect can lead to greater consumer purchases because a decrease in prices increases the buying power of consumers, effectively making them feel wealthier without an actual increase in income.

Step-by-step explanation:

The income effect describes changes in consumer behavior resulting from an effective change in income or purchasing power, even when nominal income hasn't changed. Specifically, when the price of a good decreases, consumers have more buying power, enabling them to purchase more goods with their fixed income, effectively making them feel wealthier. Conversely, if the price of a good increases, their buying power diminishes, and they feel poorer, likely reducing their consumption of those goods.

In the context of the question, the best answer is (c) The income effect makes customers feel wealthier, leading to increased purchases. When goods become cheaper, the income effect can lead to consumers buying more since they feel as though they can afford more with their income due to increased buying power.