Question

a) Can a normal good have a positive substitution effect? b) Can an inferior good have...

a) Can a normal good have a positive substitution effect?

b) Can an inferior good have a positive substitution effect?

c) Can a normal good have a positive income effect?

d) Can an inferior good have a positive income effect?

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Answer #1

a) A normal good will have a positive substitution effect since when the price of the other good rises then the consumer will increase the consumption of the normal good since it has been becoming relatively cheaper.

b) An inferior good will have a positive substitution effect since when the price of the other good increases the consumer will find the inferior good relatively cheaper and hence increase its consumption.

c) A normal good will have a positive income effect since an increase in the income will lead the consumer to purchase more of that good. Hence, income effect is positive.

d) An inferior good will have a negative income effect. This is because an increase in the income will induce the consumer to spend on normal good as compared to an inferior good and this will lead to a reduction in the demand of the inferior good.

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