Which of the following is a false statement about the substitution effect associated with an increase in the price of good x?
A)operates in the same direction as the income effect if it is normal
B)is dominated by the income effect if it is a Giffen good
C)dominates the income effect if x is a Giffen good
D)does not lead the individual to buy more x

Question

Quizplus · Accepted Answer

This statement is false because the substitution effect always leads to the individual buying more of the relatively cheaper good (in this case, not good x), regardless of whether good x is a normal or inferior good. The income effect, on the other hand, depends on whether the individual sees x as a normal or inferior good, and whether the price increase leads to a decrease or increase in their purchasing power. In the case of a Giffen good, the income effect dominates the substitution effect, but this does not mean that the substitution effect disappears completely.

Which of the Following Is a False Statement About the Substitution