Identify the truthfulness of the following statements.
I. The substitution effect is unambiguous in its direction.
II) Direction of the income effect depends on whether the good is a normal or an inferior good.
A) Both I and II are true.
B) Both I and II are false.
C) I is true; II is false.
D) I is false; II is true.

Question

Identify the truthfulness of the following statements. 
I. The substitution effect is unambiguous in its direction.
II) Direction of the income effect depends on whether the good is a normal or an inferior good.
A) Both I and II are true.
B) Both I and II are false.
C) I is true; II is false.
D) I is false; II is true.

Quizplus · Accepted Answer

The substitution effect always moves in the same direction, as consumers substitute away from relatively more expensive goods. The income effect varies depending on whether the good is normal (demand increases with income) or inferior (demand decreases with income).

Identify the Truthfulness of the Following Statements