If a good is an inferior good and its price decreases, the income effect:
A) and the substitution effect work in the same direction to increase quantity demanded.
B) and the substitution effect cancel each other out, and there is no change in quantity demanded.
C) has a stronger and positive effect on quantity demanded than the substitution effect.
D) has a negative effect on quantity demanded, but typically the substitution effect tends to dominate the income effect, resulting in an increase in quantity demanded.

Question

Quizplus · Accepted Answer

When the price of an inferior good decreases, the income effect (which would normally decrease demand for an inferior good as real income increases) is negative, but the substitution effect (which increases demand as the good becomes relatively cheaper compared to substitutes) typically dominates. This leads to an overall increase in quantity demanded despite the negative income effect.

If a Good Is an Inferior Good and Its Price