Consider a downward-sloping demand curve.When the price of an inferior good increases, the income and substitution effects
A)work in the same direction to increase quantity demanded.
B)work in the same direction to decrease quantity demanded.
C)work in opposite directions and quantity demanded increases.
D)work in opposite directions and quantity demanded decreases.

Question

Quizplus · Accepted Answer

For an inferior good, as the price increases, the income effect leads to a decrease in quantity demanded because the decrease in purchasing power of consumers reduces their ability to afford the good. At the same time, the substitution effect leads consumers to switch to cheaper substitute goods, which further reduces the quantity demanded of the inferior good. Therefore, the income and substitution effects work in opposite directions, leading to a decrease in quantity demanded.

Consider a Downward-Sloping Demand Curve