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Homework answers / question archive / Which of the following statements is correct? a
a. |
If the income and substitution effects of a price change for good x move the quantity demanded of good x in the same direction, then x is an inferior good. |
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b. |
If the income and substitution effects of a price change for good x move the quantity demanded of good x in opposite directions, then x is a normal good. |
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c. |
If the income and substitution effects of a price change for good x move the quantity demanded of good x in opposite directions and the income effect of the price change is greater than its substitution effect, then x is a Giffen good. |
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d. |
b and c both |
a. |
Along this demand curve, the level of utility is held constant and the level of income changes. Consequently, movements along this demand curve illustrate only substitution effects of price changes. |
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b. |
Along this demand curve, the level of utility changes and the level of income is held constant. Consequently, movements along this demand curve include both substitution and income effects of price changes |
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c. |
Along this demand curve, both the level of income and utility are held constant. Consequently, movements along this demand curve illustrate only substitution effects. |
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d. |
Along this demand curve, both the level of income and utility change. Consequently, movements along this demand curve include both substitution and income effects of price changes. |
Refer to figure 1. Goods x and y are: Figure 1: Quantity of y 1 1. Y1 yo U U. ?? ?1 Quantity of x a. gross and net complements b.gross complements but net substitutes c. gross and net substitutes d.gross substitutes but net complements.
Correct option is ' option C
Giffen goods are those goods for which price and quantity varies directly . For giffen goods price effect must be positive and substitution effect is negative and income effect outweigh the substitution effect. Therefore price effect and quantity demanded must be directly related Price effect can be positive only when income effect is positive and it is greater than negative substitution effect means that substitution effect work in opposite direction
option a is incorrect because in case of inferior goods substitution effect is negative and more than the positive income effect
option b is incorrect because in case of normal good both income effect and substitution effect are negatively related.