If the income effect and substitution effect work in the same direction, then the good in question is a:
A)normal good
B)inferior good
C)Giffen good
D)luxury good

Question

Quizplus · Accepted Answer

If the income effect and substitution effect work in the same direction, then it means that an increase in price of the good leads to a decrease in quantity demanded. But the decrease in quantity demanded is not large enough to offset the increase in price, thus leading to an increase in total revenue (P x Q). This is only possible for normal goods. For inferior goods, the income and substitution effect work in opposite directions, leading to a decrease in total revenue when price increases. Giffen goods are a rare exception where the income effect is so strong that an increase in price leads to an increase in quantity demanded. Luxury goods are not necessarily affected by income changes and can have different income and substitution effects.

If the Income Effect and Substitution Effect Work in the Same