When the price of a normal good decreases, people increase their consumption of the good. The reason is
A) the law of diminishing marginal utility.
B) the substitution and income effects.
C) the substitution effect only.
D) the income effect only.

Question

Quizplus · Accepted Answer

The substitution effect occurs when the price of one good decreases, causing consumers to substitute it for other goods that are now relatively more expensive. The income effect occurs because the lower price allows consumers to purchase more of the good with their income, increasing overall consumption. Therefore, both effects contribute to the increase in consumption of normal goods when the price decreases. The law of diminishing marginal utility states that as consumption of a good increases, the satisfaction gained from consuming an additional unit of the good decreases, but it does not directly relate to changes in price.

When the Price of a Normal Good Decreases, People Increase