Suppose the price of rice increases and you view rice as an inferior good. The substitution effect results in a ________ change in rice consumption, and the income effect leads to a ________ change in rice consumption.

Question

Quizplus · Accepted Answer

When the price of rice increases, people will try to substitute other goods for rice, resulting in a negative substitution effect. However, as rice is an inferior good, the increase in price means that people feel poorer and have less purchasing power, leading to a positive income effect. Therefore, the overall change in rice consumption will be negative due to the combination of a negative substitution effect and a positive income effect.

Suppose the Price of Rice Increases and You View Rice