Practice question · Multiple choice
The substitution effect always pushes consumption of a cheapened good upward, and the income effect can push either way. Why the asymmetry?
Hints
- Ask what the substitution effect holds constant, and what remains free to vary.
- For an inferior good, what happens to demand when you become richer?
Show the answer
A. Substitution is defined at constant purchasing power
Why
Compensating away the income change leaves only the relative-price tilt, which has one possible direction by construction. The income effect asks whether the good is one you buy more or less of as you get richer, which is why inferior goods open the theoretical door to a Giffen good.
Practise Income and Substitution Effects
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