Income Elasticity and Engel's Law

Steps:

• Classify food as a necessity (income elasticity <1) and leisure as a normal/luxury good (elasticity >1).
• When income decreases, absolute spending on both falls, but proportions shift based on elasticity.
• For necessities like food, the proportion of income spent rises (Engel's law).
• For leisure, the proportion falls as it's more sensitive to income changes.

Why C is correct:

• Engel's law states that as income falls, the budget share for food (a necessity) increases; leisure, as a normal good, sees a decreased share due to higher elasticity.

Why the others are wrong:

• A: Leisure proportion decreases, not increases, with falling income.
• B: Food proportion increases, not decreases, per Engel's law.
• D: Both proportions decrease or stay similar, but food rises while leisure falls.

Final answer: C