Question

When the price of an inferior good falls, the substitution effect contributes to a(n) _____ in the quantity demanded, and the income effect _____ the substitution effect.

decrease; reinforces
	decrease; opposes
	increase; reinforces
	increase; opposes

I know that the substitution effect will cause an increase in the quantity demanded. However, does the fact that it is an inferior good effect it? Also, the would the income effect reinforce the substitution effect?

Answer 1

Increase; opposes

Substitution effect is not affected by the fact that it is an inferior good. It just takes into account how costly is it compared to other goods.

Income effect on the other hand is affected by the good being inferior. We know for inferior goods increase in income leads to decrease in demand for the good. When the price falls the purchasing power of the consumer increases which is like an increase in income. Thus income effect leads to decrease in quantity demanded.