Question

82. Forming the demand curve for goods a. The income effect must be greater than the substitution effect. b. The substitution effect must be in the same direction as the income effect. c. The substitution effect and income effect can be in the same or opposite direction d. The substitution effect must be greater than the income effect.

Answer 1

The correct answer is c. The substitution effect and income effect can be in the same or opposite direction.

Step-by-step explanation:

The correct answer is c. The substitution effect and income effect can be in the same or opposite direction.

The demand curve for goods is formed by the combination of the substitution effect and the income effect. The substitution effect shows how a change in price of a good affects the demand for that good relative to other goods, while the income effect shows how a change in income affects the demand for a good.

The direction of the substitution effect and income effect can vary depending on the type of good. For normal goods, the substitution effect and income effect typically work in the same direction, meaning that when the price of a good increases, consumers substitute it with other goods and consume less of it. When income increases, consumers can afford to buy more of a good and consume more of it. However, for inferior goods, the income effect and substitution effect can work in opposite directions. For example, if a good is considered inferior and its price decreases, the substitution effect may lead consumers to buy less of it, while the income effect may lead them to buy more.