The substitution effect and income effect always reinforce each other.

Question

Quizplus · Accepted Answer

The substitution effect and income effect can sometimes work in opposite directions, leading to opposing effects on the quantity demanded of a good. For example, if the price of a normal good increases, the substitution effect suggests that consumers will switch to cheaper substitutes, leading to a decrease in quantity demanded. However, the income effect suggests that the decrease in real purchasing power due to the price increase will also lead to a decrease in quantity demanded. These opposing effects can either reinforce or offset each other depending on the direction and magnitude of the changes in price and income.

The Substitution Effect and Income Effect Always Reinforce Each Other