What happens if the price of lattes, a normal good that you enjoy, falls?
A)The income and substitution effects offset each other, but the price effect leads you to buy more lattes.
B)Both the income and substitution effects lead you to buy more lattes.
C)The income effect which causes you to increase your latte consumption outweighs the substitution effect which causes you to reduce your latte consumption, resulting in more lattes purchased.
D)The substitution effect which causes you to increase your latte consumption outweighs the income effect which causes you to reduce your latte consumption, resulting in more lattes purchased.

Question

Quizplus · Accepted Answer

Both the income effect and the substitution effect lead to an increase in the consumption of lattes when their price falls. The income effect makes you feel richer because you can afford more with the same amount of money, and the substitution effect makes lattes relatively cheaper compared to other goods, encouraging you to buy more lattes instead of other goods.

What Happens If the Price of Lattes, a Normal Good