Suppose that consumers' preferences satisfy completeness, continuity, transitivity, reflexivity and strong monotonicity. Furthermore, assume that is a normal good, is an inferior good and that the price of good increases. Then, which of the following effects is known with certainty?
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Suppose that consumers' preferences satisfy completeness, continuity, transitivity, reflexivity and strong monotonicity. Furthermore, assume that X is a normal good, Y is an inferior good and that the price of good Y increases. Then, which of the following effects is known with certainty? (A) The income and substitution effect will reinforce one another leading to an overall decrease in the consumption of good X (B) The income and substitution effect will reinforce one another leading to an overall increase in the consumption of good Y (C) The income and substitution effect will reinforce one another leading to an overall increase in the consumption of good X (D) The income and substitution effect will have competing effects leading to an indeterminate impact on the consumption of good Y
Demand theory and elasticity has come up 161 times in 7 exams since 2004.
This question is on Income and substitution effects: the Slutsky equation, part of Demand theory and elasticity in Microeconomics.
Splitting a price change into a substitution effect and an income effect, and why Giffen goods break the law of demand.
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Question from the JNU SSS 2017 paper. Solutions are TestStop's own. Not affiliated with or endorsed by any examination authority.