If a good is normal, then:
A)the income effect is larger than the substitution effect.
B)the income effect moves in the same direction as the substitution effect.
C)the income effect moves in the opposite direction of the substitution effect.
D)the income and substitution effects are ambiguous.

Question

Quizplus · Accepted Answer

When a good is normal, the income effect and substitution effect move in the same direction. As income rises, the consumer will buy more of the normal good because they have more money to spend. This is the income effect. At the same time, the price of the normal good will seem relatively cheaper, causing the consumer to substitute it for other goods. This is the substitution effect. Since both effects move in the same direction, the answer is B.

If a Good Is Normal, Then