If a good is inferior and the price increases, then the income effect will beO negativeO ambiguousO positivezero

Answered: If a good is inferior and the price…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

If a good is inferior and the price increases, then the income effect will be
O negative
O ambiguous
O positive
zero

Expert Solution

Step 1

Income effect refers to the effect where the change in income leads to more of quantity demanded. In case of normal goods, when income increases, the quantity demanded of normal goods also increases while in the case of inferior goods, with the change in the income, the quantity demanded decreases.

Step 2

Option A is correct

The income effect in the case of inferior goods is negative because the inferior goods are the goods which a person uses when there is shortage of funds. Hence, in case of the price increase, the income effect on the inferior goods will become negative.

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