If there is an increase in the price of good Z and the quantity demanded of Z goes down, a possible explanation for this is:
A) Z is a normal good.
B) the substitution effect.
C) Z is a Giffen good.
D) both A and B are correct.

Question

Quizplus · Accepted Answer

The observed behavior is consistent with both Z being a normal good and the substitution effect. When the price of a good increases, if it's a normal good, demand typically decreases because consumers' purchasing power is effectively reduced. The substitution effect describes how consumers will switch to cheaper alternatives when the price of a good increases, also leading to a decrease in the quantity demanded of the more expensive good.

If There Is an Increase in the Price of Good