If a Consumer Increases Her Quantity of Ice Cream Consumed

question 21

Multiple Choice

If a consumer increases her quantity of ice cream consumed by 100% when her income rises by 25%, then her income elasticity of demand for ice cream is

• A)8.0.
• B)4.0.
• C).25.
• D).08.

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Definitions:

Framing Effects

In prospect theory, changes in people’s decision making caused by new information that alters the context, or “frame of reference,” that they use to judge whether options are viewed as gains or losses relative to the status quo.

Mental Accounting

The tendency people have to create separate “mental boxes” (or “accounts”) in which they deal with particular financial transactions in isolation rather than dealing with them as part of an overall decision-making process that would consider how to best allocate their limited budgets across all possible options by using the utility-maximizing rule.

Overpriced Warranties

Service contracts sold at a price significantly higher than the expected cost of repairs, often criticized for their value relative to the benefits provided.

Losses

The negative financial result from business activities when costs exceed revenues.