QUESTION 9 If a good is inferior and its price decreases, a. the income effect will be positive and the substitution effect will be negative. b. the income effect will be negative and the substitution effect will be negative. c. the income effect will be negative and the substitution effect will be positive. d. the income effect will be positive and the substitution effect will be positive.
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Step 1: Identify the scenario — the price of a good falls and the good is specified to be inferior. Show more…
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The following can be said about the income and substitution effects of a price increase on the demand for a good whose price rose: a. The former is always positive and the latter is always negative. b. Both can be either positive or negative. c. While the latter is always negative, the former can be either positive or negative. d. While the former is always negative, the latter can be either positive or negative. e. The former can at times be negative, but it will never overwhelm the latter.
Mauya M.
With inferior goods (like ramen noodles), the income effect works in the opposite direction from the income effect discussed in the text. If a consumer feels richer, she would buy less of an inferior good. If she feels poorer, she would buy more. a. Suppose that a consumer eats two different foods: potatoes and meat. Potatoes are inferior and meat is a luxury. Describe both the income and substitution effects on the consumer's optimal choice of potatoes and meat if the price of potatoes were to rise. Put the two effects together. What can you conclude? b. What if you knew for sure that the substitution effect dominated the income effect? What would happen to the consumer's optimal choices for potatoes and meat? c. What if instead you knew that the income effect dominated the substitution effect? What would happen in this case? Why is this result a bit unusual?
Akash M.
If the price of pasta increases and the consumer buys more pasta, we can infer that a. pasta is a normal good and income effect is greater than substitution effect b. pasta is a normal good and substitution effect is greater than income effect c. pasta is an inferior good and income effect is greater than substitution effect d. pasta is an inferior good and substitution effect is greater than income effect
Jennifer S.
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