Engel's Law and Budget Shares

Steps:

• Identify food as a necessity with income elasticity less than 1, so its budget share rises when income falls.
• Recognize leisure as a likely luxury good with income elasticity greater than 1, so its budget share falls with lower income.
• Apply Engel's law: the proportion of income spent on food increases as income decreases.
• Conclude the changes: food proportion increases, leisure proportion decreases.

Why C is correct:

• Engel's law states that the budget share for food rises with falling income, while luxuries like leisure see a declining share due to higher elasticity.

Why the others are wrong:

• A: Leisure proportion cannot increase for a luxury when income falls.
• B: Food proportion does not decrease; it rises per Engel's law.
• D: Neither proportion increases; food rises but leisure falls.

Final answer: C