Consider the income and substitution effects of price changes.If the price of a normal good changes,the income effect of the price change will
A)always be larger than the substitution effect.
B)always be to increase quantity demanded.
C)reinforce the substitution effect.
D)produce a positively sloped demand curve.
E)oppose the substitution effect.

Question

Quizplus · Accepted Answer

The income effect and substitution effect work together to determine the overall effect of a price change on the quantity demanded of a normal good. The income effect is the change in quantity demanded due to a change in purchasing power, while the substitution effect is the change in quantity demanded due to a change in the relative price of the good. In the case of a normal good, the income and substitution effects reinforce each other, meaning that they work in the same direction. Therefore, the income effect will reinforce the substitution effect rather than oppose it, as stated in option E. Options A, B, and D are also incorrect. While it is true that the income effect is usually larger than the substitution effect for normal goods, this is not always the case, so option A is incorrect. Also, the direction of the income effect on quantity demanded depends on whether the good is normal or inferior, so option B is incorrect. Finally, a positively sloped demand curve implies that an increase in price will decrease quantity demanded, whereas the question does not specify the direction of the price change, so option D is also incorrect.

Consider the Income and Substitution Effects of Price Changes