Question22. When the price of an inferior good rise, the substitution effect the quantity demanded and the income effect the quantity demanded.
A. Decreases; decreases
B. Decreases; increases
C. Increases; decreases
D. Increases; increases
sis J 1 (o)
Normal
Studdy Solution
STEP 1
What is this asking?
How does the quantity demanded of an inferior good change when its price increases, considering *both* the substitution and income effects?
Watch out!
Don't mix up *inferior* goods with *normal* goods!
The income effect works differently for them.
STEP 2
1. Substitution Effect
2. Income Effect
3. Combined Effect
STEP 3
When the price of *any* good goes up, the **substitution effect** *always* causes the quantity demanded to **decrease**.
Why? Because people will look for **substitutes**!
If steak becomes more expensive, you might buy more chicken.
If an inferior good, let's say ramen noodles, becomes more expensive, you might switch to a slightly less inferior good, like cheaper pasta.
STEP 4
Here's where it gets interesting!
With an **inferior good**, when the price goes up, it feels like your **purchasing power** has gone down.
You feel a little *poorer*.
Now, since it's an *inferior* good, you actually buy *more* of it when you feel poorer.
So, the **income effect** causes the quantity demanded to **increase**.
Think about it: if ramen gets more expensive, and you feel a bit strapped for cash, you might eat *more* ramen because you can't afford other things as easily.
STEP 5
Now, let's put it together!
The **substitution effect** pushes the quantity demanded **down**, while the **income effect** pushes it **up**.
For an inferior good, the substitution effect is usually **stronger** than the income effect.
So, overall, the quantity demanded will **decrease**, but not as much as it would for a normal good.
STEP 6
The **substitution effect** decreases the quantity demanded, and the **income effect** increases the quantity demanded.
The answer is **B**.
Was this helpful?
