A consumer's bundle includes good X and good Y. If good X is an inferior good, the size of the income effect is smaller than the substitution effect, goods X and Y are substitutes, and the price of good X rises, the consumer will buy ____ of good X and ____ of good Y.

Question

Quizplus · Accepted Answer

When the price of good X rises, two effects occur: the substitution effect and the income effect. Since good X is an inferior good, the income effect leads to buying more of good X as income effectively falls, but this is smaller than the substitution effect, which leads to buying less of good X because it's now relatively more expensive compared to good Y. Since goods X and Y are substitutes, the consumer will buy less of good X and more of good Y, aligning with the substitution effect being dominant.

A Consumer's Bundle Includes Good X and Good Y