[amp_mcq option1=”substitution and income effects are positive” option2=”positive substitution effect is equal to the negative income effect” option3=”substitution effect is positive and income effect is negative” option4=”substitution and income effects are negative” correct=”option3″]<\/p>\n
The correct answer is C. substitution effect is positive and income effect is negative.<\/p>\n
An inferior good is a good whose demand decreases when consumers’ income increases. This is because consumers tend to substitute other, more desirable goods for inferior goods as their income increases.<\/p>\n
The substitution effect is the change in the quantity demanded of a good due to a change in its relative price, holding real income constant. In the case of an inferior good, the substitution effect is positive because consumers will substitute away from the inferior good as its price increases.<\/p>\n
The income effect is the change in the quantity demanded of a good due to a change in real income, holding relative prices constant. In the case of an inferior good, the income effect is negative because consumers will demand less of the inferior good as their income increases.<\/p>\n
Therefore, in the case of an inferior good, the substitution effect is positive and the income effect is negative. This means that the demand for an inferior good will decrease when its price increases, even though consumers have more money to spend.<\/p>\n","protected":false},"excerpt":{"rendered":"
[amp_mcq option1=”substitution and income effects are positive” option2=”positive substitution effect is equal to the negative income effect” option3=”substitution effect is positive and income effect is negative” option4=”substitution and income effects are negative” correct=”option3″]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[12],"tags":[],"class_list":["post-51018","post","type-post","status-publish","format-standard","hentry","category-economics","no-featured-image-padding"],"yoast_head":"\n