Suppose the price of beef declines by $0.50 per pound at the supermarket.Consumers of beef immediately increase their purchases of beef.This illustrates:
A)the fact that beef is an inferior good.
B)the cross-elasticity effect of a price decrease.
C)the substitution effect of a price decrease.
D)the fact that beef is an economic bad.
E)the income effect of rise in price.

Question

Quizplus · Accepted Answer

This situation illustrates the substitution effect of a price decrease, which predicts that consumers will switch from purchasing substitute goods (such as chicken or pork) to the now relatively cheaper good (beef). This is different from the income effect, which predicts that the decrease in price would increase the purchasing power of consumers' incomes, leading them to purchase more of all goods, not just beef. The fact that consumers increase their purchases of beef contradicts the notion that beef is an inferior good, which would lead consumers to purchase less of it as their incomes increase. Finally, there is no evidence in this situation to suggest that beef is an economic bad.

Suppose the Price of Beef Declines by $0