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

Question

Quizplus · Accepted Answer

For an inferior good, when its price increases, the income effect leads consumers to buy more of it because they feel poorer and switch to cheaper alternatives (inferior goods). However, the substitution effect, which is the change in consumption patterns due to a relative price change, usually dominates. This means consumers will substitute the now more expensive inferior good with cheaper alternatives, leading to a decrease in the quantity demanded of the inferior good.

If a Good Is an Inferior Good and Its Price