CONSUMPTION HYPOTHESIS

2014 JUNE III
‘Bandwagon effect’ is found in
A) Relative Income hypothesis B) Permanent Income hypothesis
C) Life cycle Hypothesis D) Absolute Income hypothesis

ANSWER: (A) The concept of demonstration effect is defined as a situation where an individual in a community try to imitate or copy the consumption standard of others in that community. When demonstration effect works, a relatively low income earner in a community would devote a major portion of his income to keep up with the consumption level of people in that high income earning community. On the other hand, if a high income earner is living in a community where majority of people are low income earners, he needs to compensate only less portion of his income to keep up with others.