Question

How do the income and substitution effects affect quantity demanded for luxury goods?

Answer 1

It depends on the type of the good whether it is normal, inferior or giffen good.

Explanation:

In the case of luxury goods, there are 2 possibilities, either the good is a normal good or Giffen good.

In the case of normal good, the substitution effect is bigger than the income effect, where the price effect is positive.

However, in the case of Giffen good the income effect is bigger than the substitution effect, where the price effect is negative.