Suppose the price of good x falls.As a result,the quantity demanded for good x increases for a particular consumer.For this consumer,the substitution effect induced the consumer to purchase more x while the income effect induced the consumer to purchase less x.We can infer that
A)x is a normal good.
B)x is an inferior good.
C)x is a Giffen good.
D)x is a luxury good.

Question

Quizplus · Accepted Answer

The substitution effect leads to an increase in the quantity demanded of good x, while the income effect leads to a decrease in the quantity demanded of good x. This implies that good x is an inferior good for this consumer. When the price falls, the consumer substitutes away from other, relatively more expensive goods (the substitution effect) in favor of the now relatively cheaper good x, but also gains purchasing power given the budget constraint, and so will purchase less of good x (income effect).

Suppose the Price of Good X Falls