Question

In the consumer model discussed in section, a change in the price of food leads to two effects, substitution and income, that

1. reinforce each other

2. offset each other

3. None of the above

Answer 1

Ans is A

We know food is a normal good.

an increase in the price of food will increase demand because now it becomes relatively cheaper and demand also increases because real income increases

However both effect will increase demand but change(Increase) in demand due to income and substitution effect will be lower.

Thus both income and substitution effect reinforces each other