Suppose that consumers' preferences are well behaved in that properties 4-1 to 4-4 are satisfied.Furthermore,assume that X is a normal good,Y is an inferior good,and the price of good X increases.Then the substitution effect will lead consumers to consume:
A) more of good X and more of good Y.
B) less of good X and more of good Y.
C) less of good X and less of good Y.
D) more of good X and less of good Y.

Question

Quizplus · Accepted Answer

Since X is a normal good, its demand will decrease due to the increase in price (law of demand). Therefore, the substitution effect will lead consumers to consume less of X. On the other hand, Y is an inferior good, so as the income of consumers increases, they tend to consume less of Y. As the price of X increases, Y becomes relatively less expensive, and the substitution effect will lead consumers to consume more of Y. Hence, the answer is B.

Suppose That Consumers' Preferences Are Well Behaved in That Properties