To derive the demand curve for a good,which of the following must be the case
A)The income effect must be greater than the substitution effect.
B)The substitution effect must be greater than the income effect.
C)The substitution effect must be in the same direction as the income effect.
D)The income effect and the substitution effect may be in the same or in opposite directions.

Question

Quizplus · Accepted Answer

To derive the demand curve for a good, both the substitution effect (change in quantity demanded due to change in the relative price of the good) and the income effect (change in quantity demanded due to change in consumer's purchasing power) need to be taken into account. The direction of these effects can be in the same or opposite direction depending on the good and consumer preferences, hence there is no requirement for either effect to be greater than the other or for them to be in the same direction. Therefore, option D is the correct answer.

To Derive the Demand Curve for a Good,which of the Following