Answer to Question #106831 in Microeconomics for Steve

Question

Which of the following is true concerning the substitution effect of a decrease in price?
1) it will lead to an increase in consumption only for normal food
2) it will always lead to an increase in consumption
3) it will lead to an increase in consumption only for an inferior good
4) it will lead to an increase increase in consumption only for a Giffen good
5) it will lead to a decrease in consumption for a Giffen and inferior good

Answer 1

A normal good is a commodity whose demand increases when incomes increases. For a consumer, a decrease in price would mean an increase in disposal income and thus, he will increase the consumption of normal good.

1) it will lead to an increase in consumption only for normal food