What is the relationship between budget share and demand elasticity?

The correct answer highlights an important concept in economics regarding the relationship between the share of a consumer's budget spent on a good and the elasticity of demand for that good. When a consumer allocates a larger share of their budget to a particular good, the demand for that good tends to become more elastic.

This occurs because if a consumer is spending a significant portion of their income on a good, they are more sensitive to changes in its price. Larger expenditures often lead consumers to seek alternatives or to adjust their consumption habits more readily in response to price changes. In contrast, goods that take up a smaller budget share might not elicit the same level of responsiveness to price changes because the impact on the overall budget is less significant.

Thus, when the budget share increases, consumers are likely to react stronger to price changes, leading to a higher elasticity of demand. This understanding is crucial for businesses and policymakers when considering pricing strategies and the potential impact of market changes on consumer behavior.