Question

1. When the price of a normal good falls, the substitution effect contributes to a(n) _______ in the quantity demanded and the income effect _______ the substitution effect.

2. The law of diminishing marginal returns assumes that

Answer 1

1. When the price of a normal good falls, the substitution effect contributes to a(n) increase in the quantity demanded and the income effect confirms the substitution effect.

reason: According to the law of demand, when the price of a normal good falls, consumers will buy more of that good and less of other good. This is called substitution effect. The demand thus increases.

Income effect suggests that when a consumer's income increases, he will buy more of a normal good. Or, his demand increases.

Thus, according to both substitution and income effects, the fall in price will lead to an increase in quantity demanded. Income efffect cofirms the substitution effect.

2. The law of diminishing marginal returns assumes that technology is constant, and only one factor changes; while other factors of production remain constant

reason: The law of diminishing marginal returns assumes that only labor changes and capital remains constant, Thus it calculates the change in labor and the resulting change in production. It also assumes there is no change in technology. That is, labor intensive prodction remains so, and not change into capital intensive.