A rational consumer prefers more of good x to less.If the price of good x rises and the prices of all other goods remain constant, then the consumer must necessarily demand less of x.

Question

Quizplus · Accepted Answer

While it might be expected that a consumer would demand less of a good as its price increases, this is not necessarily the case due to the income and substitution effects. The substitution effect might lead the consumer to buy less of the more expensive good and more of a substitute. However, the income effect, which reflects the change in the consumer's purchasing power, could lead to different outcomes depending on whether the good is normal or inferior. For an inferior good, an increase in price, effectively reducing real income, could lead to an increase in demand for the good if the income effect outweighs the substitution effect.

A Rational Consumer Prefers More of Good X to Less