Question:
Which of the following helps in explaining why the demand curve for an inferior good is downward sloping?
(1) The income and substitution effects move the quantity demanded in the same direction.
(2) The income effect equals the substitution effect.
(3) The negative income effect dominates the substitution effect.
(4) The substitution effect dominates the negative income effect.
(5) The consumer increases the consumption of the good with an increase in income.
Correct Answer:
(4)
Answer Explanation:
For an inferior good, a price drop causes a positive substitution effect (buy more) but a negative income effect (real income rises, so buy less of the inferior good). As long as the positive substitution effect is larger than the negative income effect, the demand curve still slopes downward.
Topic: Demand Theory Year: 2022
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