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No, the substitution effect is not always negative. It refers to the change in quantity demanded of a good when its price changes, leading consumers to substitute it with other goods. While a price increase typically results in a decrease in quantity demanded (a negative substitution effect), a price decrease can lead to an increase in quantity demanded, which can be viewed as a positive effect. Thus, the direction of the substitution effect depends on the nature of the price change.

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What is true of the substitution effect on an increase in the price of a normal good?

When the price of a normal good increases, the substitution effect leads consumers to seek alternative goods that are relatively cheaper. This shift occurs because consumers will substitute the more expensive good with other products that fulfill similar needs or desires. As a result, the quantity demanded for the normal good decreases, as individuals adjust their consumption patterns in response to the higher price. Overall, the substitution effect reinforces the negative relationship between price and quantity demanded for normal goods.


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