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 Y increases.Then,which of the following effects is known with certainty?
A) The income and substitution effects reinforce one another, leading to an overall decrease in the consumption of good X.
B) The income and substitution effects will reinforce one another, leading to an overall increase in the consumption of good Y.
C) The income and substitution effects will reinforce one another, leading to an overall increase in the consumption of good X.
D) The income and substitution effects will have competing effects, leading to an indeterminate impact on the consumption of good Y.

Question

Quizplus · Accepted Answer

When the price of an inferior good (Y) increases, the income effect leads to an increase in consumption (because the consumer feels poorer and thus consumes more of the inferior good), while the substitution effect leads to a decrease in consumption (as consumers substitute away from the now more expensive good Y to other goods). These effects work in opposite directions, making the overall impact on the consumption of good Y indeterminate.

Suppose That Consumers' Preferences Are Well Behaved in That Properties