The income effect of a price increase of a normal good is to ________ of that good and the substitution effect is to _________ of that good?
Correct answer: C. reduce quantity demanded, reduce quantity demanded
- A. increase quantity demanded, reduce quantity demanded
- B. increase quantity demanded, increases quantity demanded
- C. reduce quantity demanded, reduce quantity demanded
- D. reduce quantity demanded, increase quantity demanded
Explanation
A price increase lowers the consumer’s real purchasing power, so the income effect reduces demand for a normal good. The substitution effect also reduces its quantity demanded because consumers switch toward relatively cheaper alternatives.
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Individual consumers, firms and markets are examined through demand and supply, elasticity, consumer choice, production, costs, revenue and the determination of prices and output. The topic also covers market structures such as perfect competition, monopoly and oligopoly, plus market failure, externalities and the distinction between microeconomic decisions and economy-wide outcomes.
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