If the price of lattes, a normal good you enjoy, falls,
A) the income and substitution effects offset each other but the price effect leads you to buy more lattes.
B) both the income and substitution effects lead you to buy more lattes.
C) the income effect which causes you to increase your latte consumption outweighs the substitution effect which causes you to reduce your latte consumption, resulting in more latte purchased.
D) the substitution effect which causes you to increase your latte consumption outweighs the income effect which causes you to reduce your latte consumption, resulting in more latte purchased.

Question

Quizplus · Accepted Answer

As the price of lattes falls, the substitution effect dominates, causing you to switch from other beverages to lattes, and the income effect also increases your purchasing power, allowing you to buy more lattes. Both effects work in the same direction, leading to an increase in latte consumption. Therefore, both the income and substitution effects lead you to buy more lattes.

If the Price of Lattes, a Normal Good You Enjoy