Question

Which of the following statements characterize the ’Normal Good’?
(A). The quantity demanded of a commodity increases as its price falls.
(B). The income effect of price change is positive.
(C). The substitution effect of price change is negative.
(D). The income and substitution effects work in the opposite direction.

Choose the correct answer from the options given below:

• A. (A), (B) and (D) only.
• B. (A), (B) and (C) only.
• C. (A), (B), (C) and (D).
• D. (B), (C) and (D) only.

Hint:

Normal good: Demand rises with income; income and substitution effects align to increase demand as price falls.

Answer 1

The Correct Option is B

Step 1: For a normal good, income and substitution effects always work in the same direction.
Step 2: This makes (A) demand rising as price falls, (B) positive income effect, and (C) negative substitution effect all true.
Step 3: Statement (D), claiming opposite-direction effects, is false since that only occurs for inferior or Giffen goods.
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