Question

The downward-sloping demand curve can be explained in terms of ______ and ______.

• A. the income effect
• B. the substitution effect
• C. both (A) and (B)
• D. neither (A) nor (B)

Answer 1

Answer: (C)

both (A) and (B)

The downward-sloping demand curve can be explained in terms of the income effect and the substitution effect. Income effect indicates that when the income of the consumer rises then the demand gets increased, and vice versa. Whereas, the substitution effect states that when the price of one good rises, the demand for the substitute good falls.