Question : The Psychological Law of Consumption states that
Option 1: proportionate increase in consumption is less than a proportionate increase in income.
Option 2: increase in income is equal to an increase in consumption.
Option 3: increase in consumption is greater than the increase in income.
Option 4: consumption does not change with a change in income.
Correct Answer: proportionate increase in consumption is less than a proportionate increase in income.
Solution : The correct answer is a proportionate increase in consumption is less than a proportionate increase in income.
According to the Psychological Law of Consumption , when income rises, consumption rises as well, although at a slower rate than income. It means that people are more likely to save a portion of their higher earnings. People may save a portion of their income once their fundamental requirements are covered to save for future needs or to attain financial objectives.
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