Question

Rodi owns Hallman's auto repair service. He has observed over the years that customers keep their high-mileage cars longer when the economy is doing poorly, creating demand for his maintenance and repair service. Rodi has observed the impact of _______ on demand for his service.

Answer 1

the income effect

Step-by-step explanation:

The income effect in economics relates to a change in demand of a good or service as a result of a change in the real income of consumers which causes a change in their purchasing power.

When an economy is doing poorly, the real income of consumers would be affected negatively as their purchasing power reduces. Hence, in the scenario given in the question concerning cars, customers would rather keep high-mileage cars longer, and to do so, maintenance and repair would be more frequent to keep such cars longer. This would result in high demand for Rodi’s maintenance and repair services, as a result of the impact of the income effect on demand for his service.