When the price of a product falls: Group of answer choices a.The income and substitution effects...

When the price of a product falls:

Group of answer choices

a.The income and substitution effects will encourage consumers to purchase more of a Giffen good.

b.substitution effect will encourage consumers to purchase more of the product and the income effect will encourage them to purchase less of a normal good.

c.income and substitution effects will encourage consumers to purchase less of an inferior good.

d.substitution effect will encourage consumers to purchase more of the product and the income effect will encourage them to purchase less of a Giffen good.

Solutions

Expert Solution

It shall be noted that the substitution effect of price falls would always encourage consumers to purchase more of the product.

In the case of a normal good, the income effect of price fall would always encourage consumers to purchase more of the product.

In the case of inferior goods & Giffen goods, the income effect of price fall would always encourage consumers to purchase less of the product.

However, in the case of an inferior good, the positive substitution effect is more than the negative income effect as the result of which with the price fall, the consumer would end up purchasing more of inferior goods.

In the case of a Giffen good, the positive substitution effect is less than the negative income effect as the result of which with the price fall, the consumer would end up purchasing less of Giffen goods.

Thus, the correct answer is - d.substitution effect will encourage consumers to purchase more of the product and the income effect will encourage them to purchase less of a Giffen good.

Rahul Sunny answered 1 year ago

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