Suppose peanut butter is an inferior good for Ilya and the price of peanut butter rises.What will happen to Ilya's consumption of peanut butter?
A)The substitution effect will cause an increase in the consumption of peanut butter.
B)The substitution effect will cause a decrease in the consumption of peanut butter and the income effect will cause an increase in the consumption of peanut butter.
C)The substitution effect will cause a decrease in the consumption of peanut butter.
D)The income effect will cause an increase in the consumption of peanut butter.

Question

Quizplus · Accepted Answer

When the price of an inferior good like peanut butter rises, the substitution effect leads consumers to buy less of it because it becomes relatively more expensive compared to other goods. However, for an inferior good, the income effect (which occurs because the consumer effectively feels poorer due to the price increase) leads to an increase in consumption, as consumers might shift towards more of the inferior good as it becomes a larger part of their consumption bundle.

Suppose Peanut Butter Is an Inferior Good for Ilya and the Price