D. Suppose there are only two normal goods in the economy, X and Y. If price of good X increases, which would be the correct statement from below?

The correct answer is  Demand for good X decreases and demand for Y is indeterminate.

Key PointsImpact of Price Increase on Demand

• When the price of a normal good X increases, the demand for good X decreases due to the law of demand, which states that, ceteris paribus, an increase in price leads to a decrease in quantity demanded.
• The effect on the demand for good Y is indeterminate because it depends on the nature of the relationship between goods X and Y.
• If goods X and Y are substitutes, an increase in the price of X may increase the demand for Y as consumers switch from X to Y.
• If goods X and Y are complements, an increase in the price of X may decrease the demand for Y as the consumption of both goods together falls.

Additional Information

• Normal Goods: These are goods for which demand increases as consumer income rises and decreases as consumer income falls. Examples include electronics, clothing, and many everyday items.
• Law of Demand: This economic principle states that, all else being equal, as the price of a good increases, the quantity demanded of that good decreases, and vice versa.
• Substitute Goods: These are goods that can be used in place of one another. For example, tea and coffee are substitutes. If the price of tea increases, the demand for coffee might increase as consumers switch to the cheaper alternative.
• Complementary Goods: These are goods that are often used together, such that an increase in the price of one decreases the demand for the other. For example, printers and ink cartridges are complements.
• Income Effect: This refers to the change in consumption patterns due to a change in purchasing power. For normal goods, an increase in income typically leads to an increase in demand.
• Substitution Effect: This occurs when consumers replace more expensive items with less costly alternatives as prices change, impacting the demand for both the original and substitute goods.