Question

1. “If a consumer buys less of a particular good when their income decreases, they will also buy less of the good when its price increases.” Is this statement true, false, or uncertain? Fully explain your answer.

Answer 1

The given statement is true

Reason-:

Total change = Price effect = Substitution effect + Income effect

In substitution effect, the relationship is always the same that is if the price increases, consumption decreases and if it decreases consumption increases. What decides whether the good is normal, inferior or giffen is the income where it is given that if the decreases, the consumer buy less. With price decrease, there is also decrease in real income which means consumption decreases and with substitution effect, the price increases consumption decreases. So since substitution as well as income effect decrease the consumption, the net consumption also decreases all in all.