Answer to Question #131901 in Microeconomics for Syeda Sanjida Akbar

Question

Suppose a consumer has preferences between two goods that are perfect
substitutes. Can you change prices in such a way that the entire demand
response is due to the income effect?

Answer 1

Yes. This occurs when a consumer does not switch between the two goods due to price change. 

When two goods are substitutes, we usually reduce the price of expensive one, the consumer substitutes the good, which was relatively more expensive earlier, with another one. So it is a substitution effect. 

But if we decrease the price of already inexpensive good, the purchasing power of consumer increases, as he buys more of the inexpensive product. This change in demand, when he now buys more of the inexpensive good, has been caused due to increase in real income due to fall in price of the already inexpensive good.

Thus, if we reduce the price of the already inexpensive good further, the entire demand response is due to income effect.