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 (buying more because it’s cheaper) is positive, but the income effect (buying less because you feel richer) is negative. Since people still buy more overall when price falls, the strong substitution effect must dominate the weak negative income effect.

Topic: Elasticity Year: 2024