Dave consumes two normal goods,X and Y,and is currently at an optimum.If the price of good X falls,we can predict with certainty that
A) Dave will definitely consume more of both goods since his real income has risen.
B) the substitution effect will be positive for good X and negative for good Y.
C) may consume more or less of good X and he will definitely consume less of good Y.
D) the substitution effect will offset the income effect for good X.

Question

Quizplus · Accepted Answer

When the price of good X falls, it becomes relatively cheaper compared to good Y, leading to a positive substitution effect of consuming more of good X and less of good Y. However, the income effect can go either way depending on the magnitude of the price change and Dave's income elasticity of demand for both goods. Therefore, we cannot definitively say that Dave will consume more or less of good X and Y, but we can predict with certainty that the substitution effect will be positive for good X and negative for good Y.

Dave Consumes Two Normal Goods,X and Y,and Is Currently at an Optimum.If