Consider the ordinary and compensated demand curves for a normal good.If the price of the good falls,then
A) the ordinary demand curve will show the larger increase in quantity demanded.
B) the compensated demand curve will show the larger increase in quantity demanded.
C) the increase in quantity demanded will be the same for the ordinary and compensated demand curves.
D) we cannot predict whether ordinary or compensated demand will show the larger response in quantity demanded.

Question

Quizplus · Accepted Answer

The ordinary demand curve reflects the consumer's actual response to changes in price without taking into account any income effects. On the other hand, the compensated demand curve shows the consumer's response to changes in price after adjusting for the income effect. Since the price of the good has fallen, the consumer's purchasing power has increased, leading to a positive income effect. The income effect will cause the consumer to substitute some of the cheaper good for other goods, decreasing the quantity demanded of the good in question. The magnitude of the income effect will depend on the consumer's income elasticity of demand. Therefore, the ordinary demand curve will show a larger increase in quantity demanded compared to the compensated demand curve, which will be affected by the income effect.

Consider the Ordinary and Compensated Demand Curves for a Normal