When the price of a normal good decreases, the ________ can be divided between the ________, which keeps the best affordable point on the same indifference curve and the ________, which moves the best affordable point farther away from the origin.
A) substitution effect; price effect; income effect
B) price effect; income effect; substitution effect
C) income effect; substitution effect; price effect
D) price effect; substitution effect; income effect

Question

Quizplus · Accepted Answer

When the price of a normal good decreases, there are two effects: the substitution effect and the income effect. The substitution effect occurs because the lower price of the good makes it relatively cheaper compared to other goods, so consumers switch to buying more of that good. The income effect occurs because the lower price increases the purchasing power of consumers' income, allowing them to buy more of all goods, including the one with the lower price. The price effect is a combination of both effects, and it refers to the net effect on the quantity demanded of the good resulting from the lower price. In this case, the income effect moves the best affordable point farther away from the origin, while the substitution effect keeps the best affordable point on the same indifference curve. Therefore, the correct answer is D.

When the Price of a Normal Good Decreases, the ________