When the price of a good changes,
A) the income effect is always positive and the substitution effect is always negative.
B) both the substitution effect and the income effect can be either positive or negative.
C) the income effect can be positive or negative, but the substitution effect is always negative.
D) the income effect can be negative, but in such cases it will never overwhelm the substitution effect.
E) none of the above

Question

Quizplus · Accepted Answer

The substitution effect is always negative because consumers will substitute away from a good that has become relatively more expensive. The income effect can be positive or negative depending on whether the good is normal or inferior.

When the Price of a Good Changes