TE, SE, IE. When the price of good 1 decreases , the following is true (select a
ID: 1148006 • Letter: T
Question
TE, SE, IE. When the price of good 1 decreases, the following is true (select all that applies):
If good 1 is a normal good, then the substitution effect leads to increase in consumption of it.
If good 1 is an inferior good, then the substitution effect leads to decrease in consumption of it.
If good 1 is a normal good, then the income effect leads to decrease in consumption of it.
If good 1 is an inferior good, then the income effect leads to decrease in consumption of it.
As long as good 1 is an inferior good, the total effect always leads to a decrease in consumption of it.
If total effect leads to decrease in consumption of good 1, then income effect must also lead to decrease in consumption of it.
a.If good 1 is a normal good, then the substitution effect leads to increase in consumption of it.
b.If good 1 is an inferior good, then the substitution effect leads to decrease in consumption of it.
c.If good 1 is a normal good, then the income effect leads to decrease in consumption of it.
d.If good 1 is an inferior good, then the income effect leads to decrease in consumption of it.
e.As long as good 1 is an inferior good, the total effect always leads to a decrease in consumption of it.
f.If total effect leads to decrease in consumption of good 1, then income effect must also lead to decrease in consumption of it.
Explanation / Answer
When there is a decrease in the price of any of the product, the income effect indicates that there should be an increased consumption of this good if it is normal good and that there should be a decreased consumption of this good if it is an inferior good. Hence option D is correct.
When the good is a Giffen good, its consumption falls when its price is decreased because income effect which discourages its consumption, also dominates substitution effect and so total effect also discourages its consumption,. Hence option F is also correct.
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