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Difficulty: EasyIncome and Substitution Effects on Demand

For a normal good, the substitution effect and the income effect operate in opposite directions following a change in the price of the good.

Answer: Answer

Answer

The statement is False. For a normal good, the substitution effect and the income effect operate in the same direction.
The statement is false because for any normal good, a price decrease creates a substitution effect and an income effect that both work in the same direction to increase total quantity demanded.

Step-by-Step Solution

1
Examine the substitution effect direction upon a price decrease.
The substitution effect always induces a consumer to purchase more of a good when its relative price falls.
The good becomes relatively less expensive compared to alternative substitute goods.
2
Examine the income effect direction for a normal good.
The increase in real purchasing power leads to an increase in the quantity demanded of the normal good.
By definition, the demand for a normal good rises as real income increases.
3
Combine both effects to determine their directional relationship.
Both the substitution effect and the income effect push quantity demanded in the same upward direction.
Because both effects act constructively together, they do not oppose each other for normal goods.

Key Concept

Directional interaction of income and substitution effects for normal goods
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Topics

Income and Substitution Effects on Demand

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