Suppose that consumers' preferences are well behaved in that properties 4-1 to 4-4 are satisfied.Furthermore,assume that both X and Y are inferior goods and the price of good Y 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 both X and Y are inferior goods, when the price of Y increases, consumers will want to consume less of it due to the income effect. However, since Y is a substitute for X, the price increase of Y will make X relatively cheaper, leading consumers to consume more of X due to the substitution effect. Therefore, the overall effect is that consumers will consume more of good X and less of good Y, leading to choice letter D.

Suppose That Consumers' Preferences Are Well Behaved in That Properties