You review a salesman's income over a 5-year period. You note it fluctuates tremendously from year to year, yet his consumption of goods and services remains consistently at the same level, year after year
Does this mean that income is not a determinant of consumption, or could something else explain his behavior?
The salesman is not making purchase decisions based on his current income. He is making his consumption decisions based on his expected future income. He is following a pattern exhibited by many people. He prefers to keep his consumption fairly stable from year to year. Yet his income fluctuates significantly. That is, current income explains consumption quite well except in this case when current income is unusually high or unusually low compared to expected future income.
You might also like to view...
Adam Smith’s diamond-water puzzle
A. can be resolved by distinguishing between marginal and total utility. B. occurs because diamonds have no utility. C. occurs because scarcity increases total utility. D. will likely never be resolved with existing economic tools.
How does the distribution of wealth differ from the distribution of income in the United States?
What will be an ideal response?
An example of an ongoing expense for a toy company would be buying:
A. a delivery truck, and would be included in total cost. B. a new factory, and would be excluded from total cost. C. advertising for their products, and would be included in total cost. D. None of these is true.
Imagine that the state legislature raises the tax on gasoline by 10 cents/gallon. What most likely happens next?
a. Service station operators pass along the tax to you, adding the 10 cents to the price of a gallon of gas. b. Service station operators grumble, but pay the tax without passing the cost along to you. c. Service station operators pass along as much of the tax to you as they can, probably about 6 cents/gallon. d. None of these choices.