When we derive the demand curve for a good, we should remember that the
A)income effect must be greater than the substitution effect.
B)substitution effect must be greater than the income effect.
C)substitution effect must be in the same direction as the income effect.
D)income effect and the substitution effect may work in the same or in opposite directions.

Question

Quizplus · Accepted Answer

The income effect and substitution effect can work together or in opposite directions depending on the elasticity of the good and the consumer's preferences. If the good is elastic, meaning that consumers can easily find substitutes, the substitution effect will be greater than the income effect, and vice versa. Therefore, the income effect and substitution effect may work in the same direction or in opposite directions.

When We Derive the Demand Curve for a Good, We