Question

Which of the following statements characterize the ’Normal Good’?
(A). The quantity demanded of a commodity increases as its price falls.
(B). The income effect of price change is positive.
(C). The substitution effect of price change is negative.
(D). The income and substitution effects work in the opposite direction.

Choose the correct answer from the options given below:

• A. (A), (B) and (D) only.
• B. (A), (B) and (C) only.
• C. (A), (B), (C) and (D).
• D. (B), (C) and (D) only.

Hint:

Normal good: Demand rises with income; income and substitution effects align to increase demand as price falls.

Answer 1

The Correct Option is B

A normal good is characterized by increased demand as consumer income rises. The statements are evaluated as follows:
- (A) is correct: For normal goods, the quantity demanded increases as the price falls, following the law of demand, due to income and substitution effects.
- (B) is correct: The income effect is positive for normal goods. When the price of a normal good falls, the real income of consumers increases, leading to higher demand (positive income effect). Conversely, as income rises, demand for normal goods increases.
- (C) is correct: The substitution effect is negative. When the price of a normal good rises, consumers substitute it with cheaper alternatives, reducing its quantity demanded (negative substitution effect).
- (D) is incorrect: For normal goods, the income and substitution effects work in the {same direction, both reinforcing the negative relationship between price and quantity demanded. When price falls, both effects increase demand; when price rises, both reduce demand. (Note: For inferior goods or Giffen goods, these effects may oppose each other.)
Thus, option (2) is correct, as (A), (B), and (C) accurately characterize normal goods.

Answer 2

Testing the odd statement out:
For a normal good, the substitution effect and income effect of a price change always reinforce each other in the same direction: a price fall makes the good relatively cheaper, raising quantity demanded through the substitution effect, and it also raises real income, which further raises demand through a positive income effect. Because these effects always point the same way for a normal good, Statement (D), which claims they act in opposite directions, is false, that pattern instead describes inferior or Giffen goods. Since (A), (B) and (C) are the standard textbook properties of a normal good and only (D) fails, the answer is (A), (B) and (C) only, option (2).