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Difficulty: MediumIncome and Substitution Effects on Demand

For a normal good, a decrease in price creates substitution and income effects that operate in the same direction, thereby reinforcing an increase in total quantity demanded.

Answer: Answer

Answer

The statement is true because for normal goods, both the substitution effect and the income effect increase quantity demanded when the price falls.
For a normal good, a reduction in price makes the commodity relatively cheaper (inducing a positive substitution effect on quantity demanded) and increases the consumer's real income (inducing a positive income effect on quantity demanded). Consequently, both components work together in the same direction to boost overall demand.

Step-by-Step Solution

1
Analyze the direction of the substitution effect following a price decrease.
The substitution effect is always negative with respect to price change; a fall in price makes the good relatively cheaper, leading to an increase in quantity demanded.
Consumers substitute away from relatively more expensive goods toward the cheaper good.
2
Analyze the direction of the income effect for a normal good when price falls.
A lower price increases real purchasing power. For a normal good, an increase in real income leads to an increase in quantity demanded.
Normal goods have a positive income elasticity of demand.
3
Synthesize the total price effect by combining both components.
Since both the substitution effect and the income effect push in the direction of higher consumption, the total price effect is positive (quantity demanded increases).
Total Price Effect = Substitution Effect + Income Effect.

Key Concept

Income and Substitution Effects on Normal Goods
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Topics

Income and Substitution Effects on Demand

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