The price of peaches goes up and I observe you buying fewer strawberries. This implies strawberries must be a normal good.

Answer the following statement true (T) or false (F)

True

Rationale:

In the graph below, the substitution effect (from A to B) tells us that more strawberries should be consumed. If strawberry consumption decreases from the original A when we get to the final budget, the final bundle C lies below A --- implying it also lies below B. Thus, as income falls (from the dashed compensated to the final budget), strawberry consumption falls, making strawberries a normal good.

Economics

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