Final answer:
For a normal good, when its price falls, both the substitution effect (consumers favoring the cheaper good over others) and the income effect (consumers having more purchasing power) lead to an increase in quantity demanded, meaning they work in the same direction. Therefore, the correct option is c. If the price of a normal good falls, the income effect will increase quantity demanded while the substitution effect will increase quantity demanded, so these two effects are in the same direction.
Step-by-step explanation:
When discussing the statement "When the price of a normal good falls, the income and substitution effects work in the same direction," we are addressing how consumers respond to changes in price for goods they typically purchase. These effects are components of consumer choice theory in microeconomics. The substitution effect occurs when the price of a good drops, making it more attractive relative to other goods, prompting consumers to substitute this cheaper good for more expensive alternatives.
On the other hand, the income effect is observed when a price decrease effectively increases the consumer's purchasing power, allowing them to buy more of the good with the same amount of money. For a normal good, both of these effects cause an increase in the quantity demanded when the price decreases. Consumers substitute the cheaper good for others (substitution effect) and can now afford to buy more due to increased purchasing power (income effect). Therefore, the correct option is c. If the price of a normal good falls, the income effect will increase quantity demanded while the substitution effect will increase quantity demanded, so these two effects are in the same direction.