Question:
The Table below shows substitution and income effects of a price change of good X. Which represents the correct combination?
(1) Inferior / Falls / Decreases / Increases.
(2) Inferior / Rises / Decreases / Decreases.
(3) Inferior / Rises / Increases / Increases.
(4) Normal / Falls / Increases / Increases.
(5) Normal / Rises / Increases / Decreases.
Correct Answer:
(4)
Answer Explanation:
For a “normal good”, when the price falls, two things happen: 1) The Substitution Effect makes the good relatively cheaper, increasing quantity demanded. 2) The Income Effect increases the consumer’s real purchasing power, which also increases quantity demanded (since it is a normal good). Both effects reinforce each other to increase demand.
Topic: Consumer Theory Year: 2019
Leave a Reply