Nick considers macaroni and cheese to be an inferior good. As a result of macaroni and cheese being an inferior good, the
A) substitution effect must be larger in magnitude than the income effect so that less is purchased as the price falls.
B) substitution effect must be smaller in magnitude than the income effect so that less is purchased as the price falls.
C) income effect is positive, so that more is purchased as income increases.
D) income effect is negative, so that less is purchased as income increases.

Question

Quizplus · Accepted Answer

When a good is considered inferior, the income effect is negative, meaning that as income increases, the quantity demanded of the inferior good decreases. Therefore, as the price of macaroni and cheese falls, the income effect leads to a decrease in the quantity demanded, which is larger than the substitution effect. This is why the answer is D.

Nick Considers Macaroni and Cheese to Be an Inferior Good