Suppose that consumers' preferences are well behaved in that properties 4-1 - 4-4 are satisfied.Furthermore, assume that both X and Y are normal goods and that the price of good Y decreases.Then, which of the following effect is known with certainty.
A)the income and substitution effect reinforce one another leading to an overall increase in the consumption of good X.
B)the income and substitution effect reinforce one another leading to an overall decrease in the consumption of good X.
C)the income and substitution effect will have competing effects leading to an indeterminate impact on the consumption of good X.
D)the income and substitution effect will reinforce one another leading to an overall increase in the consumption of good Y.

Question

Quizplus · Accepted Answer

When the price of good Y decreases, the substitution effect will lead to an increase in the consumption of good Y because it becomes relatively cheaper. Additionally, since Y is a normal good, the income effect will also lead to an increase in consumption as the consumer feels effectively richer. Thus, both effects reinforce each other, leading to an overall increase in the consumption of good Y.

Suppose That Consumers' Preferences Are Well Behaved in That Properties