Question

when the price of an inferior good falls, the substitution effect leads to.................. in the quantity purchased, and the income effect leads to......................... in the quantity purchased.

A) an increase; an increase

B) an increase; a decrease

C) a decrease; an increase

D) a decrease; a decrease

which one is the right answer?? and why? GIVE EXAMPLE PLEASE

Answer 1

The substitution and income effect always works in the same direction for normal goods but in case of an inferior good, the substitution and income effect works in the opposite direction

A fall in the price of an inferior good would lead to an increase in the quantity demanded but the income effect will dominate the substitution effect and so with the price decrease, the income of the consumer increases which he will spend to buy better or normal goods.

Option(B)