Question

When the price of a normal good increases,

a. both the income and substitution effects encourage the consumer to purchase more of the good.
b. the income effect encourages the consumer to purchase more of the good, and the substitution effect encourages the consumer to purchase less of the good.
c. the income effect encourages the consumer to purchase less of the good, and the substitution effect encourages the consumer to purchase more of the good.
d. both the income and substitution effects encourage the consumer to purchase less of the good.

Answer 1

d. both the income and substitution effects encourage the consumer to purchase less of the good.

Step-by-step explanation:

The income effect is the effect on the income when there are price changes. When the price increases, people can buy less products with the same income which means that the consumer will be encouraged to purchase less goods.

The substitution effect says that an increase in the price of a product will make customers to buy other similar products which will make them to purchase less of the good with the higher price.