BUSINESS ADMINISTRATION
BUSINESS ECONOMICS
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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They spend less
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They spend proportionately more
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They save proportionately more
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They save proportionately less
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Detailed explanation-1: -An increase in income (the ability to spend more money) results in a demand for more services and goods. A decrease in income results in the exact opposite. In general, when incomes are lower, less spending occurs, and businesses are hurt by the effect.
Detailed explanation-2: -Solution. At a lower level of income, a consumer spends a larger proportion of his/her income on consumption expenditure (basic survival requirements). As the income increases, owing to the psychological behavior of a consumer (rational), people tend to consume less and save more for future uncertainty.
Detailed explanation-3: -If income goes up then consumption will go up and savings will go up. Consider the graph below, which shows Consumption as a positive function of Income: Notice the use of the 45˚ degree line to illustrate the point at which income is equal to consumption.
Detailed explanation-4: -When Income increases, consumption expenditure also increases but by a smaller amount. Thus, it increases less than proportionately. 4. The increased income will be divided in some proportion between consumption expenditure and saving.