If a good is inferior, then:
A)the income effect moves in the opposite direction of the substitution effect.
B)the income effect is larger than the substitution effect.
C)the income and substitution effects are ambiguous.
D)the income effect moves in the same direction as the substitution effect.

Question

Quizplus · Accepted Answer

An inferior good is a good for which demand decreases as income increases. In this case, the income effect moves in the opposite direction of the substitution effect. As income increases, the consumer will want to purchase less of the inferior good and substitute it for a superior good. The substitution effect is the movement from the original bundle to the new bundle as a result of a change in relative prices, and works in the same direction as the income effect for normal goods. However, for inferior goods, the income effect is larger and moves in the opposite direction of the substitution effect. Therefore, the best choice is A.

If a Good Is Inferior, Then