Multiple choice

When the price of a normal goods falls, more of it is purchased because of

  1. positive substitution effect only

  2. positive income effect only

  3. both (1) and (2) above

  4. none of the above
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

When the price of a normal good falls, consumers buy more due to two effects: (1) the substitution effect - the good becomes cheaper relative to substitutes, and (2) the income effect - the consumer's purchasing power increases. Both effects work in the same direction for normal goods, increasing quantity demanded.

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