When a consumer's income increases and the price of their favorite good decreases, both factors can influence their optimal spending behavior, typically leading to a change in consumption patterns based on the principles of microeconomics.
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Income Effect: With an increase in income to $1,500, the consumer has more purchasing power. This generally allows them to buy more goods and services overall, including their favorite good. The extent to which they increase their consumption of the favorite good depends on its nature (whether it's a normal good or an inferior good).
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Substitution Effect: A 25% decrease in the price of their favorite good makes it relatively cheaper compared to other goods. This encourages the consumer to substitute their favorite good for other goods they may have been purchasing. The lower price means that they can buy more of the same good for the same amount of money, or they may choose to allocate a portion of their budget to other goods that were originally too expensive.
Combined Effect:
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If the consumer views their favorite good as a normal good (which is likely the case), they will likely buy more of it due to both the increased income and the decrease in price.
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The consumer's optimal consumption combination will adjust where they will likely consume a higher quantity of their favorite good and potentially lessen their consumption of other goods if they reallocate their budget towards the cheaper favorite good.
To summarize, with increased income and a decrease in price, the consumer would ideally increase their consumption of their favorite good significantly, given its lower price and the additional purchasing power from the income increase. This change reflects both the substitution and income effects in their optimal spending behavior.