Answer to Question #85644 in Microeconomics for AVENUE HEALTHCARE

Question

Clearly describe substitution effect and income effect for a fall in price for a normal good and an inferior good

Answer 1

For normal goods, the income effect is positive. This aspect shows that with the decrease in price of normal goods there is an increase in the purchasing power and the income effect act in the same direction as the substitution effect. Therefore, both income effect and substitution effect increases the demand of goods whose prices have fallen.