Gasoline is a normal good. If the price of gasoline falls, a consumer buys more gasoline because of
A) only an income effect.
B) only a substitution effect.
C) an increase in the marginal rate of substitution.
D) both an income effect and a substitution effect.

Question

Quizplus · Accepted Answer

When the price of gasoline falls, the consumer has more purchasing power due to an increase in real income. This increase in purchasing power leads to the income effect, which makes the consumer able to purchase more gasoline. Additionally, the lower price of gasoline makes it relatively cheaper compared to other goods, which incentivizes the consumer to substitute other goods with gasoline. This leads to the substitution effect, which also causes the consumer to buy more gasoline. Therefore, both the income effect and the substitution effect work together to increase the quantity demanded of gasoline.

Gasoline Is a Normal Good