(2) If a good is normal, then an increase in the price of the good will lead to which of the following to be true for this good? (Assume that there are only two goods, the individual's preferences lead to well-behaved preferences with strictly convex indifference curves and an interior solution for all budgets). Let SE = substitution effect, IE = income effect) (a) The magnitude of the IE for this good must be larger than the magnitude of the SE (b) The magnitude of the SE for this good must be larger than the magnitude of the IE (c) The good could be a Giffen good (d) The good must be an ordinary good (e) None of the above
(2) If a good is normal, then an increase in the price of the good will lead to which of the following to be true for this good? (Assume that there are only two goods, the individual's preferences lead to well-behaved preferences with strictly convex indifference curves and an interior solution for all budgets). Let SE = substitution effect, IE = income effect) (a) The magnitude of the IE for this good must be larger than the magnitude of the SE (b) The magnitude of the SE for this good must be larger than the magnitude of the IE (c) The good could be a Giffen good (d) The good must be an ordinary good (e) None of the above
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:(2) If a good is normal, then an increase in the price of the good will lead to which of the
following to be true for this good? (Assume that there are only two goods, the individual's
preferences lead to well-behaved preferences with strictly convex indifference curves and an
interior solution for all budgets). Let SE = substitution effect, IE = income effect)
(a) The magnitude of the IE for this good must be larger than the magnitude of the SE
(b) The magnitude of the SE for this good must be larger than the magnitude of the IE
(c) The good could be a Giffen good
(d) The good must be an ordinary good
(e) None of the above
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