The substitution effect of a price increase causes a decrease in the quantity demanded of an inferior good.

Question

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The substitution effect states that as the price of a good increases, consumers will switch to a substitute good that is now relatively cheaper. For inferior goods, which are goods where demand decreases as income increases, a price increase leads to an even stronger substitution effect as consumers look for higher quality substitutes. Thus, the quantity demanded of an inferior good decreases when its price increases.

The Substitution Effect of a Price Increase Causes a Decrease