In the case of inferior goods, the substitution effect and the income effect:
A) move in opposite directions.
B) move in the same direction.
C) cancel each other out in every case.
D) will in all cases cause demand to be upsloping.

Question

Quizplus · Accepted Answer

In the case of inferior goods, as income increases, people tend to switch to higher-quality goods, causing a negative substitution effect (i.e., a decrease in demand for the inferior goods). However, at the same time, the increase in income leads to an increase in demand for all goods (including inferior goods), which is known as the income effect. Since these effects work in opposite directions, they can cause an overall ambiguous effect on the demand for inferior goods.

In the Case of Inferior Goods, the Substitution Effect and the Income