Examkin

Question

Difficulty: MediumIncome and Substitution Effects on Demand

When the price of an inferior good decreases, the resulting income effect reinforces the substitution effect, causing a larger total increase in quantity demanded than would occur for a normal good.

Answer: Answer

Answer

The statement is False. For an inferior good, a price reduction increases real income, generating a negative income effect (buying less of the good). This income effect opposes the substitution effect rather than reinforcing it.
The correct evaluation is that the statement is False. When the price of an inferior commodity falls, the consumer's real income rises. Because demand for inferior goods moves inversely with real income, this income effect reduces quantity demanded, opposing the positive substitution effect. Thus, the income effect dampens rather than reinforces the overall increase in demand.

Step-by-Step Solution

1
Analyze the Substitution Effect of a price reduction
A lower price makes the commodity relatively cheaper compared to alternative goods, encouraging consumers to substitute toward it and increase quantity demanded.
The substitution effect always operates inversely to price changes regardless of whether the commodity is normal or inferior.
2
Analyze the Income Effect of a price reduction for an inferior good
A lower price increases real purchasing power. By definition, higher real income reduces the consumption of an inferior good.
Inferior goods possess a negative income elasticity of demand.
3
Compare the directional interaction of Income and Substitution Effects
For normal goods, income and substitution effects work in the same direction (reinforcing each other). For inferior goods, the income effect opposes (partially offsets) the substitution effect.
Total Price Effect = Substitution Effect + Income Effect.

Key Concept

Directional Interaction of Income and Substitution Effects for Inferior Goods
Rate this question

Topics

Income and Substitution Effects on Demand

More questions from this topic