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Figure: Income and Substitution Effects
-(Figure: Income and Substitution Effects) Look at the figure Income and Substitution Effects. Carlos is consuming his optimal consumption bundle at point A when the price of gasoline falls. As Carlos moves to his new optimal consumption bundle, we observe that gasoline:
A) is not an ordinary good.
B) is a normal good.
C) is an inferior good.
D) and good L are complements.

Question

Use the following to answer questions:
Figure: Income and Substitution Effects 
-(Figure: Income and Substitution Effects) Look at the figure Income and Substitution Effects. Carlos is consuming his optimal consumption bundle at point A when the price of gasoline falls. As Carlos moves to his new optimal consumption bundle, we observe that gasoline:
A) is not an ordinary good. 
B) is a normal good. 
C) is an inferior good. 
D) and good L are complements.

Quizplus · Accepted Answer

When the price of gasoline falls and Carlos moves to a new optimal consumption bundle, if gasoline is a normal good, the quantity consumed increases as income effect and substitution effect both lead to higher consumption.

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