Housing is a normal good that tends to take up a substantial share of a consumer's spending.An increase in the price of housing will result in:
A)both an income and substitution effect to decrease the quantity demanded of housing.
B)both an income and substitution effect to increase the quantity demanded of housing.
C)the income effect of increasing the quantity demanded of housing and the substitution effect of decreasing the quantity demanded of housing.
D)the income effect of decreasing the quantity demanded of housing and the substitution effect of increasing the quantity demanded of housing.

Question

Quizplus · Accepted Answer

An increase in the price of housing will lead to a decrease in the quantity demanded of housing due to both income and substitution effects. The income effect will occur because the consumer's purchasing power will decrease as they will have to spend more on housing, resulting in a decrease in the quantity demanded of all goods, including housing. The substitution effect will occur because the increase in the price of housing will make other goods relatively cheaper and more attractive to consumers, encouraging them to purchase less housing.

Housing Is a Normal Good That Tends to Take Up