Answer to Question #186950 in Microeconomics for lucia

Question

Imagine that you have a choice between consuming good x or y, and that the price of x increases. Since good x is now more expensive, we know that your purchasing power will decrease. We also know that the substitution effect will see you shift consumption out of good x and into good y. Is it possible that the income effect has you consuming more of both good x and y as a result of this price change? Why or why not?

Answer 1

Since income remains constant, the market impact would cause consumption of good Y to rise while consumption of good X falls. As a result, buying power will dwindle, increasing demand for good Y while decreasing demand for x.