Suppose peanut butter is an inferior good for Ilia and the price of peanut butter rises.What will happen to Ilia's consumption of peanut butter?
A)The substitution effect will cause an increase in the consumption of peanut butter.
B)The substitution effect will cause a decrease in the consumption of peanut butter and the income effect will cause an increase in the consumption of peanut butter.
C)The substitution effect will cause a decrease in the consumption of peanut butter.
D)The income effect will cause an increase in the consumption of peanut butter.

Question

Quizplus · Accepted Answer

The substitution effect will lead Ilia to consume less peanut butter as its price rises, but since peanut butter is an inferior good, the income effect will cause Ilia to consume more of it as her real income effectively decreases.

Suppose Peanut Butter Is an Inferior Good for Ilia and the Price