When the price of a normal good falls, the substitution effect contributes to a(n) _______ in the quantity demanded and the income effect _______ the substitution effect.
A) decrease; reinforces
B) increase; reinforces
C) increase; opposes
D) decrease; opposes

Question

Quizplus · Accepted Answer

When the price of a normal good falls, the substitution effect will always lead to an increase in the quantity demanded. This is because the good has become relatively cheaper compared to other goods, so consumers will switch to buying more of it. The income effect, on the other hand, will reinforce the substitution effect if the good is normal. This is because the fall in price effectively increases the consumer's purchasing power, allowing them to buy more of the good as well as other goods. Therefore, the overall effect will be an increase in the quantity demanded, and choice (B) is the correct answer.

When the Price of a Normal Good Falls, the Substitution