The demand curve for canned peas is downward sloping. If the price of canned peas, an inferior good, rises,
A) the income effect which causes you to reduce your canned peas purchases is smaller than the substitution effect which causes you to increase your purchases, resulting in a net increase in quantity demanded.
B) the income effect which causes you to increase your canned peas purchases is smaller than the substitution effect which causes you to reduce your purchases, resulting in a net decrease in quantity demanded.
C) both the income and substitution effects reinforce each other to decrease the quantity demanded.
D) the income and substitution effects offset each other, but the price effect of an inferior good leads you to buy more canned peas.

Question

Quizplus · Accepted Answer

As canned peas are an inferior good, the income effect and substitution effect work in opposite directions. The income effect implies that with an increase in price, people switch to better-quality goods; hence, they reduce their consumption of canned peas. Meanwhile, the substitution effect implies that with an increase in price, people switch to relatively cheaper alternatives; hence, they increase their consumption of canned peas. However, as canned peas are an inferior good, the income effect is stronger than the substitution effect. Therefore, the net effect is a decrease in quantity demanded.

The Demand Curve for Canned Peas Is Downward Sloping