Suppose the price of a good rises.When will the resulting income effect reduce the quantity demanded of the good?
A) Always.
B) Whenever the good is a non-Giffen good.
C) Only when the good is normal.
D) Only when the good is inferior.

Question

Quizplus · Accepted Answer

The income effect will only reduce the quantity demanded when the good is normal. For inferior goods, the income effect will actually increase the quantity demanded as consumers switch to lower-cost alternatives. For non-Giffen goods, the substitution effect will dominate the income effect, resulting in an increase in quantity demanded despite the price increase.

Suppose the Price of a Good Rises