Question

Consider the market for good x (good x is an inferior good), now let’s assume that household income has risen in the overall economy while at the same time the price of good y has increased. Good x and y are substitutes in production. What will be the overall effect on equilibrium price and quantity? Hint: do not use a graph.

Answer 1

Given that in the economy it consist two goods, x and y. Given that x is inferior good. Hence an increase in income will lead to a decrease in demand for good x and vice versa.  
Here an increase in income has occurred. Thus the demand or consumption of x will decrease.

x & y are substitutes of each other. Hence any increase in price of any of the commodity will lead to an increase in demand for the other commodity.
Here given that price of y has increased. As the goods are substitutes, thus demand for good x will increase.

Now combining all these, since the good is inferior, thus income effect will dominate substitution effect. As a result, people will consume more of x and substitute lesser of y. Price of y increases, quantity of x will increase and quantity of y will decrease in equilibrium.