Discussion
Duesenberry's relative income hypothesis rests on the assumption that utility function of an individual is influenced by :
Answer: A
The utility function is influenced by the Average consumption of the economy.
James Duesenberry's relative income hypothesis (1949) holds that a household's satisfaction depends not on its absolute consumption but on its consumption relative to that of others, typically the average of the society or reference group around it. Through this 'demonstration effect' people try to keep up with the consumption standards they observe. Duesenberry also argued that consumption depends on the highest previous income the household has reached, the 'ratchet effect'.
The options naming marginal consumption, or only the lowest or highest consumption in the economy, do not describe his comparison with average consumption.
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