Which of the following statements are correct?
(A) For a normal good, the income effect of a fall in its price raises its demand.
(B) When the price of bananas falls, the consumer’s purchasing power rises.
(C) For a Giffen good, the substitution effect is stronger than the income effect.
(D) A rise in purchasing power can sometimes lead a consumer to buy less of a good.
(E) The income effect of a fall in price lowers the consumer’s purchasing power.
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → (A), (B) and (D) only
When a good becomes cheaper, the same money income buys more. This rise in purchasing power is the income effect of the price change.
(A) For a normal good, the income effect of a fall in its price raises its demand. — Correct. Purchasing power rises, and demand for a normal good rises with income.
(B) When the price of bananas falls, the consumer’s purchasing power rises. — Correct. The same income now buys more bananas.
(C) For a Giffen good, the substitution effect is stronger than the income effect. — Incorrect. For a Giffen good the income effect is stronger, so its demand rises with its price.
(D) A rise in purchasing power can sometimes lead a consumer to buy less of a good. — Correct. This happens for a good whose demand falls as income rises.
(E) The income effect of a fall in price lowers the consumer’s purchasing power. — Incorrect. A fall in price raises purchasing power.
NCERT (2026-27): “2.4.2 Deriving a Demand Curve from Indifference Curves and Budget Constraints Moreover, as price of bananas drops, consumer’s purchasing power increases, which further increases demand for bananas (and mangoes). This is the income effect of a price change, resulting in further increase in demand for bananas. …” “2.4.3 Normal and Inferior Goods … A rise in the purchasing power (income) of the consumer can sometimes induce the consumer to reduce the consumption of a good. In such a case, the substitution effect and the income effect will work in opposite directions. … However, if the income effect is stronger than the substitution effect, the demand for the good would be positively related to its price. Such a good is called a Giffen good.” |