As people make more money, their spending behavior changes. This is known as:

• A. the substitution effect
• B. price elasticity of demand
• C. the income effect
• D. consumer surplus

Answer: (C)

Verified step by step guidance

1. Understand the concept being asked: The problem is about how people's spending behavior changes as their income changes.
2. Recall the definitions of the options: The substitution effect refers to changes in consumption due to relative price changes, price elasticity of demand measures responsiveness of quantity demanded to price changes, consumer surplus is the difference between what consumers are willing to pay and what they actually pay.
3. Identify the correct concept: The income effect specifically describes how a change in income affects the quantity demanded of goods, holding prices constant.
4. Relate the problem statement to the income effect: Since the problem mentions changes in spending behavior as income changes, this matches the income effect.
5. Conclude that the correct answer is the income effect because it directly addresses changes in consumption resulting from changes in income.