The demand for normal goods obeys the law of demand because of:
A) the substitution effect.
B) the income effect.
C) risk-aversion.
D) both the substitution and income effects.

Question

Quizplus · Accepted Answer

The law of demand states that as the price of a good increases, the quantity demanded for it decreases. This can be explained by both the substitution effect, which means that consumers will switch to substitute goods if the price of the good increases, and the income effect, which means that as the price of a good increases, the purchasing power of consumers decreases and they purchase less of the good. Therefore, the demand for normal goods obeys the law of demand due to both the substitution and income effect.

The Demand for Normal Goods Obeys the Law of Demand