When the price of an inferior good falls:
A) the substitution effect will cause the quantity demanded to decrease.
B) the substitution effect will cause the quantity demanded to increase.
C) the income effect will cause the quantity demanded to decrease.
D) both B and C will occur.

Question

Quizplus · Accepted Answer

When the price of an inferior good falls, the substitution effect (which occurs because the good has become cheaper relative to other goods, making consumers more likely to purchase it) will cause the quantity demanded to increase (B). Additionally, the income effect (which occurs because consumers effectively have more income to spend when the price of a good they buy falls) for an inferior good will cause the quantity demanded to decrease (C), as consumers will buy less of the inferior good as they feel wealthier.

When the Price of an Inferior Good Falls