Suppose that consumers' preferences are well behaved in that properties 4-1 to 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 effects is known with certainty?
A) The income and substitution effects reinforce one another, leading to an overall increase in the consumption of good X.
B) The income and substitution effects reinforce one another, leading to an overall decrease in the consumption of good X.
C) The income and substitution effects will have competing effects, leading to an indeterminate impact on the consumption of good X.
D) The income and substitution effects will reinforce one another, leading to an overall increase in the consumption of good Y.

Question

Quizplus · Accepted Answer

When the price of a normal good Y decreases, both the income effect and the substitution effect lead to an increase in the consumption of good Y. The income effect occurs because the consumer feels richer due to the price decrease, and the substitution effect occurs because good Y becomes relatively cheaper compared to other goods, making consumers more likely to purchase more of good Y.

Suppose That Consumers' Preferences Are Well Behaved in That Properties