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6 June, 12:01

Suppose that Steve heads to the local hamburger shop with $3, expecting to spend $2 for his favorite burger and $1 for French fries. When he gets there he discovers that his favorite burger is on sale for $1, so he buys two burgers and one order of French fries. Steve's consumption behavior is best explained by:

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  1. 6 June, 12:25
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    Income effect

    Explanation:

    The effect is because the customer purchasing power has been changed due to which he is now able to buy more to fulfill his needs and wants. The income effect occurs due to two reasons.

    Number 1. The real income of the person has been increased which means his purchasing power has been increased. This means previously you were earning $2000 a month and now you are earning $10000 a month. Now you can buy New Iphone every month because your real income has been increased and this has increased your purchasing power.

    Number 2. The price of the product has been fallen and now it is in range of the purchasing power of the customer. This means that if Iphones 11 are available at $100 then everybody buy Iphone 11. This is because the product is in the range of purchasing power of greater number of customers.
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