When the price of a normal good increases, the substitution effect will:
A) result in the quantity demanded going down so much that the income effect is unable to increase demand.
B) work with the income effect to exert pressure on the quantity demanded to fall.
C) work with the income effect to exert pressure on the quantity demanded to increase.
D) work in a direction opposite the income effect.

Question

Quizplus · Accepted Answer

The substitution effect will always work in the opposite direction of the price change. So, when the price of a normal good increases, the substitution effect will lead to a decrease in quantity demanded as consumers will switch to substitute goods. This, in turn, exerts pressure on the quantity demanded to fall even further when combined with the income effect. Therefore, the correct choice is B.

When the Price of a Normal Good Increases, the Substitution