When the price of a normal good rises, the income effect results in ________ in the quantity demanded and the substitution effect results in ________ in the quantity demanded.
A) an increase; an increase
B) an increase; a decrease
C) a decrease; an increase
D) a decrease; a decrease

Question

Quizplus · Accepted Answer

When the price of a normal good rises, the income effect results in a decrease in the quantity demanded since the purchasing power of the consumer's income has decreased. The substitution effect results in a decrease in the quantity demanded since consumers will substitute the now more expensive good for a cheaper alternative. Thus, both effects lead to a decrease in the quantity demanded, resulting in choice D.

When the Price of a Normal Good Rises, the Income