TutorOn by Sanath Withanage

Question:

When the price of an inferior good falls while other things remain unchanged, consumers will demand
(1) more because income effect dominates the substitution effect.
(2) less because the good is inferior.
(3) more because substitution effect and income effect reinforce each other.
(4) less because substitution effect is negative.
(5) more because substitution effect dominates the income effect.

Correct Answer:

(5)

Answer Explanation:

For an inferior good, the substitution effect is positive (buy more because it’s cheaper), but the income effect is negative (buy less because real purchasing power rose). Unless it is an extreme Giffen good, the positive substitution effect is stronger and dominates, leading to a net increase in quantity demanded.

Topic: Consumer Theory Year: 2024