For an inferior good, the income and substitution effects

Question

Quizplus · Accepted Answer

For an inferior good, the income effect and the substitution effect work against each other. The income effect suggests that as income decreases, the demand for the inferior good increases due to its lower price compared to other goods. However, the substitution effect suggests that as the price of the inferior good decreases, consumers switch to substitute goods, reducing the demand for the inferior good. Therefore, the income and substitution effects work in opposite directions, resulting in a mixed or ambiguous effect on the demand for inferior goods.

For an Inferior Good, the Income and Substitution Effects