Question

1) What determines the magnitude of the income effect when a price falls for an inferior...

1) What determines the magnitude of the income effect when a price falls for an inferior good?

(I'm guessing the Slutsky equation but how do I construct an explanation? )

2) If a consumer's preference satisfies the consumer theory (all 5 assumptions) is it possible to have two different indifference curve illustrating the same utility?

(My answer is no, but how do I construct an explanation for it?)

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Answer #1

1- Income effect is the change in demand for a good or service caused by the change in consumers' purchasing power due to the change in real income. Inferior goods are goods which demand decreases as consumers' real income rise or increase as income falls. Income elasticity of demand is negative for inferior goods.

When price of an inferior good falls, its negative income effect will tend to reduce the quantity purchased.

2- No, because an indifference curve shows a combination of two goods that give a consumer equal satisfaction and the utitlty by making the consumer indifferent.

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