Question : Assertion: The substitution effect and income effect both contribute to the downward-sloping demand curve.
Reason: The substitution effect occurs when the consumer switches to a cheaper alternative, while the income effect reflects changes in purchasing power due to price changes.
Option 1: Both the assertion and reason are true, and the reason is a correct explanation of the assertion.
Option 2: Both the assertion and reason are true, but the reason is not a correct explanation of the assertion.
Option 3: The assertion is true, but the reason is false.
Option 4: The assertion is false, but the reason is true.
Correct Answer: Both the assertion and reason are true, and the reason is a correct explanation of the assertion.
Solution : The correct answer is (a) Option A Both the assertion and reason are true, and the reason is a correct explanation of the assertion.
The downward-sloping demand curve can be explained by both the substitution effect and the income effect. The substitution effect occurs when the relative price of a good changes, leading consumers to substitute towards the relatively cheaper alternative. This effect contributes to the downward slope of the demand curve. Additionally, the income effect reflects changes in purchasing power due to price changes. When the price of a good decreases, consumers experience an increase in real income, which can lead to an increase in the quantity demanded. Conversely, when the price of a good increases, consumers' real income decreases, resulting in a decrease in the quantity demanded. The combination of the substitution effect and income effect leads to the overall downward-sloping demand curve.
