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

Question

Quizplus · Accepted Answer

Both the income and substitution effects lead to a decrease in the purchase of muffins when their price rises. The substitution effect makes other goods relatively cheaper, encouraging you to buy those instead, while the income effect makes you feel poorer, reducing your overall purchasing power, including for muffins.

What Happens If the Price of Muffins, a Normal Good