For an inferior good, the income and substitution effects

A) work together.
B) work against each other.
C) can work together or in opposition to each other depending upon their relative magnitudes.
D) always exactly cancel each other.

Question

Stormy DiLauro · Accepted Answer

Final Answer : B, Explanation :  For an inferior good, the income effect and the substitution effect work against each other. The income effect suggests that as income decreases, the demand for the inferior good increases due to its lower price compared to other goods. However, the substitution effect suggests that as the price of the inferior good decreases, consumers switch to substitute goods, reducing the demand for the inferior good. Therefore, the income and substitution effects work in opposite directions, resulting in a mixed or ambiguous effect on the demand for inferior goods.

For an inferior good, the income and substitution effects

A) work together.
B) work against each other.
C) can work together or in opposition to each other depending upon their relative magnitudes.
D) always exactly cancel each other.

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Learning Objectives

Related questions

For an inferior good, the income and substitution effectsA) work together.B) work against each other.C) can work together or in opposition to each other depending upon their relative magnitudes.D) always exactly cancel each other.

Definitions

Learning Objectives

Learning Objectives

Related questions

For an inferior good, the income and substitution effects

A) work together.
B) work against each other.
C) can work together or in opposition to each other depending upon their relative magnitudes.
D) always exactly cancel each other.