If Hannah considers biscuits an inferior good, then when their price falls, she
A)will definitely buy more biscuits
B)will definitely buy fewer biscuits
C)may buy more biscuits
D)will buy fewer biscuits if the substitution effect is larger than the income effect
E)will buy more biscuits if the substitution effect is smaller than the income effect

Question

Quizplus · Accepted Answer

If Hannah considers biscuits an inferior good, it means that as her income increases, she will reduce her consumption of biscuits and switch to other superior goods. Therefore, when the price of biscuits falls, it may induce her to buy more biscuits because they become relatively cheaper than her preferred goods. However, it also depends on the size of the substitution effect compared to the income effect. If the substitution effect dominates, then she may buy more biscuits, but if the income effect dominates, then she may still buy fewer biscuits despite the lower price. Therefore, we cannot say for sure whether she will buy more or fewer biscuits, but she may buy more biscuits.

If Hannah Considers Biscuits an Inferior Good, Then When Their