Which of the following statements about the real-income effect and the substitution effect is true?
A) The real-income effect always exists,but the substitution effect does not always exist.
B) The real-income effect and the substitution effect always exist.
C) The real-income effect does not always exist,but the substitution effect always exists.
D) The real-income effect and the substitution effect cannot occur at the same time.
E) The real-income effect and the substitution effect occur only with an increase in price.

Question

Quizplus · Accepted Answer

Both the real-income effect and the substitution effect always exist when there is a change in price of a good. The real-income effect refers to the change in purchasing power of consumers' income due to a price change, while the substitution effect refers to the change in the quantity demanded of a good due to a change in its relative price with respect to other goods. Both effects can occur simultaneously and can have an impact on the quantity demanded of a good.

Which of the Following Statements About the Real-Income Effect and the Substitution