E Compare Substitution and Income Effects

Question 1

The substitution effect always increases the consumption of a good that has fallen in price

Answer 1

Decreased Px moves consumption toward more Goodx

Consumption increases when Sub and Inc effects are positive (X –>)

Sub is positive, Inc is negative but smaller than sub, consumption still increases (X –>)

Sub is positive, inc is neg and larger than sub, consumption decreases (Income effect takes over)

Question 2

The income effect can either increase or decrease consumption of a good that has fallen in price

Answer 2

Ex: Law of Demand violated: -Inc effect > Sub, more good Y even on higher budget constraint