Amy purchases only coffee and croissants.If coffee is an inferior good and croissants are normal goods, the income effect associated with an increase in the price of croissants will result in a(n):
A)increase in the consumption of croissants and an increase in the consumption of coffee
B)increase in the consumption of croissants and a decrease in the consumption of coffee
C)decrease in the consumption of croissants and a decrease in the consumption of coffee
D)decrease in the consumption of croissants and an increase in the consumption of coffee

Question

Quizplus · Accepted Answer

As coffee is an inferior good, its consumption tends to decrease as income increases. Therefore, an increase in the price of croissants will decrease Amy's real income, which will result in a decrease in the consumption of croissants. Since coffee is an inferior good, the decrease in her real income will cause an increase in the consumption of coffee. Thus, the income effect will lead to a decrease in the consumption of croissants and an increase in the consumption of coffee.

Amy Purchases Only Coffee and Croissants