Question

please answer question 3 and 4

1 Normal I No Spac.. Heading 1 Heading 2 Title Paragraph Styles 3. Describe a scenario of your own choice where the substitution effect of a price increase will have the same sign (positive or negative) than the income effect! 4. For a price decrease related to a Giffen goods, describe the signs of both the substitution effect as well as the income effect. a.

Answer 1

3) in case of nirmal goods, both the substitution and income effect works in the same direction that is negative.

Any increase in the price will leads to decrease in the quantity demand of the normal good due to substitution effect. And in the same way the income effect works in the same direction as that of substitution effect that is in the negative because decrease in price leads to increase in the purchasing power of the consumer and hence, increase his overall demand( income effect)

Any normal good like shirts, pencils etc. Are good examples.

2) for a price decrease in case of giffen goods will decrease the quantity demand

In these giffen goods demand curve also slopes downwards.

In this the substitution effect is negative and income effect have very small value(may be positive sometimes and sometimes it may be negative) but the major role is played by the substitution effect in this as which is highly negative.