Natalie operates on a pretty tight budget.She is a price-conscious shopper and usually buys store or generic brands to save money.Recently,however,Natalie was given a pretty substantial raise.As such,she has altered her shopping patterns and now regularly buys more expensive,name-brand goods.This is an example of
A) the substitution effect.
B) the price inelasticity coefficient.
C) the income effect.
D) the target return effect.
E) cross-price elasticity.

Question

Quizplus · Accepted Answer

The scenario described is an example of the income effect. When Natalie's income increased, she was able to shift her consumption towards more expensive, name-brand goods, indicating that she had more purchasing power. The substitution effect would occur if Natalie shifted her consumption to cheaper alternatives despite the increase in income. The price inelasticity coefficient, target return effect, and cross-price elasticity are not applicable to this scenario.

Natalie Operates on a Pretty Tight Budget