Discussion
The ..................... effect of a change in price is negative for superior goods.
Answer: B
The key gives the income effect.
A change in the price of a good works through two channels. The substitution effect is the change in the quantity bought because the good has become relatively cheaper or dearer than others; it always moves against the price, so it is negative for every good. The income effect is the change because the price change alters the buyer's real income. For a superior (normal) good a price rise lowers real income and the quantity demanded falls, so the income effect moves against the price and is called negative.
For an inferior good the income effect has the opposite sign, and for a Giffen good it outweighs the substitution effect. That is why the sentence "is negative for superior goods" is a statement about the income effect: its sign depends on the kind of good, while the substitution effect is negative whatever the good. The substitution effect, option C, is also negative for superior goods, but the phrase singles out the effect whose sign depends on the type of good, and that is the reason the key chooses the income effect. The price effect is the total of the two, and inflation is not an effect of this kind.
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