Question

In most cases of demand, with a fall in prices of a commodity _____________________.

• A. positive income effect and negative substitution effect cancel out each other.
• B. positive substitution effect is reinforced by positive income effect.
• C. negative income effect and positive substitution effect cancel out each other.
• D. positive income effect and positive substitution effect cancel out each other.

Answer 1

Answer: (B)

positive substitution effect is reinforced by positive income effect.

In case of normal goods, with a fall in prices of a commodity the positive substitution effect works with additional strength, i.e, it is reinforced by positive income effect, which leads to an increase in the quantity demanded.