Economics · Consumption Theories
Duesenberry's Relative Income Hypothesis (RIH) is based on social interactions. Which of the following CORRECTLY describes the 'Demonstration Effect' under RIH?
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1Consumption remains constant over the lifetime as individuals smooth their spending
- 2Consumption is a fixed proportion of permanent income irrespective of transitory income
- 3Households imitate the consumption standards of neighbors; hence APC depends on relative income position rather than absolute income✓
- 4Consumption depends on absolute level of income regardless of the income of others
Correct answer
Households imitate the consumption standards of neighbors; hence APC depends on relative income position rather than absolute income
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