171. When the price of a normal good increases, the substitution effect will: A)

Question

171. 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.


And lastly, I would like some clarification on a Giffen good. I believe the demand curve for a giffen good was positive, but I was told it was actually negative?

Explanation / Answer

Hi Tasha, When the price of a normal good increases, the substitution effect causes demand to decline. Unless there is an increase in income (income effect) an alternate (substitute) good is chosen instead. Normal goods do not see increased demand from increased price, even with increased income (rather a higher good is selected when additional income is available), so answers A, B, C are not appropriate. Answer D is true; substitution effect acts opposite income effect for normal goods (together they create the price effect). You can think of it this way: if movie tickets cost $10 each and your entertainment budget is $30, you can buy 3. However if ticket prices rise to $15, your budget (income effect) only allows 2 (demand, which decreases). Kevin

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