Understanding Consumer Choices: How Income Affects What We Buy

What happens to Stephen's consumption habits when his income increases by $20,000 a year? When Stephen's income increases by $20,000 a year, he decreases the quantity of T-shirts and chocolate chip cookies that he buys and increases the quantity of gourmet ice cream that he buys.

Income changes can have a significant impact on individuals' consumption habits. In Stephen's case, his income increase led him to adjust what he purchases. Economic theory suggests that as people's income levels change, their preferences for goods and services may also change. This is known as the theory of marginal utility.

Stephen's decision to buy more gourmet ice cream and less T-shirts and chocolate chip cookies reflects his changing preferences due to the income increase. This is because as income rises, consumers tend to allocate more of their budget towards goods that provide higher satisfaction or utility.

Furthermore, the concept of normal goods and inferior goods plays a role in understanding Stephen's consumption patterns. Normal goods are those for which demand increases as income rises, while inferior goods are those for which demand decreases as income increases.

Therefore, Stephen's choice to buy more gourmet ice cream (a normal good for him) and less T-shirts and cookies (inferior goods for him) following the income increase is a clear illustration of how income changes affect consumer choices based on personal preferences and utility maximization.

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