Suppose the price of potatoes falls and there is a decrease in the purchases of potatoes, what can we infer?
A)The income effect is negative and exceeds the substitution effect.
B)The income effect is negative and reinforces the substitution effect.
C)The income effect is positive and exceeds the substitution effect.
D)The income effect is positive and reinforces the substitution effect.
E)The income effect is negative and just about offsets the substitution effect.

Question

Quizplus · Accepted Answer

When the price of potatoes falls and purchases decrease, it suggests that potatoes are an inferior good. The negative income effect (due to increased real income from lower prices) outweighs the substitution effect, leading to reduced consumption.

Suppose the Price of Potatoes Falls and There Is a Decrease