Question:
If the income effect of a price change is negative but the substitution effect dominates, then the good is
(1) a Giffen good.
(2) a normal good.
(3) an essential good.
(4) an inferior good.
(5) a luxury good.
Correct Answer:
(4)
Answer Explanation:
For an inferior good, the income effect is negative (as real income rises, demand falls). However, because the substitution effect (buying more because it’s relatively cheaper) is stronger and dominates, the overall quantity demanded still increases when the price falls, obeying the Law of Demand. If the negative income effect dominated, it would be a Giffen good.
Topic: Consumer Theory Year: 2020
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