Question

For normal goods, the demand curve is: A. upward sloping only if the income effect is larger than the substitution effect. B. always downward sloping. C. always upward sloping. D. downward sloping only if the substitution effect is larger than the income effect.

Answer 1

Answer:

B) always downward sloping.

Explanation:

The demand curve for normal goods is always downward sloping because of a combination of three factors:

1. the purchasing power of the customers decrease and if the price of a product increases, consumers will be able to buy less even if they don't want to
2. consumer surplus decreases since the difference between how much a consumer is wiling to pay for the good and its actual price decreases or even becomes negative, so they will not be willing to purchase it
3. as the price of normal goods increases, consumers will tend to increase the quantity demanded for substitute products