Which of the following scenarios violates the law of demand with respect to a price change?

Question

a. The substitution effect is +2 and the income effect is -2.

b. The substitution effect is +2 and the income effect is -1.

c. The substitution effect is -2 and the income effect is -2.

d. The substitution effect is -2 and the income effect is +3.

e. none of the above

Answer 1

Here's the solution:

The law of demand states that, all else being equal, as the price of a good or service increases, the quantity demanded of that good or service will decrease, and vice versa. The substitution effect and the income effect are two factors that influence the demand for a good or service when its price changes.

* Substitution effect: This effect refers to the change in demand for a good or service due to a change in its relative price compared to other goods or services.

* Income effect: This effect refers to the change in demand for a good or service due to a change in the consumer's purchasing power as a result of the price change.

To violate the law of demand, the overall effect of the price change on quantity demanded must be positive (i.e., the quantity demanded increases as the price increases).

Let's analyze the options:

* a. Substitution effect (+2) and income effect (-2): The effects cancel each other out, so the law of demand is not violated.

* b. Substitution effect (+2) and income effect (-1): The substitution effect is stronger, so the law of demand is not violated.

* c. Substitution effect (-2) and income effect (-2): Both effects reinforce each other, so the law of demand is not violated.

* d. Substitution effect (-2) and income effect (+3): The income effect is stronger, leading to an increase in demand as the price increases, which violates the law of demand.

Therefore, the correct answer is d.

Answer: d