How Does the Price of Energy Drinks Affect Granola Bars Consumption?
What happens to granola bars consumption when the price of energy drinks decreases?
a. The consumer to feel richer, so the consumer buys more granola bars.
b. The consumer to feel richer, so the consumer buys fewer granola bars.
c. Granola bars to be relatively more expensive, so the consumer buys more granola bars.
d. Granola bars to be relatively less expensive, so the consumer buys fewer granola bars.
Answer:
The income effect and substitution effect come into play when the price of goods changes. In this case, when the price of energy drinks decreases, consumers feel richer and tend to consume more granola bars, as per the income effect.
Explanation: When there is a price change for goods, two key motivations influence purchasing behavior: the substitution effect and the income effect. The income effect describes how a change in the price of goods alters the real buying power of a consumer's income. For instance, if the price of energy drinks goes down, the consumer derives a sense of increased buying power, or in other words, feels richer. This enhanced buying power leads to the consumer acting on both substitution and income effects.
In the given scenario, the decrease in the price of energy drinks makes consumers feel richer due to the income effect, causing the consumption of more granola bars (option a). This is because the consumers perceive they can afford to buy more.
However, it's important to note that the interaction of income and substitution effects doesn't always follow a predictable pattern, as it is significantly influenced by individual consumer preferences, types of goods (normal, inferior, luxury), and income levels.