Chapter 46, Problem 1MCQ

To determine

The correct statement.

Answer to Problem 1MCQ

Option e is correct.

Explanation of Solution

Explanation for the correct option:

d.

Inferior goods refer to the goods whose demand reduces when the income of consumers increases. When it comes to inferior goods, substitution and income effect works in opposite direction. Therefore, option d is the correct answer.

Explanation for incorrect options:

a.

When a small amount of consumer spending is absorbed by the goods, then the income effect explains the negative demand curve. Therefore, option a is incorrect.

b.

This effect shows the ability to substitute inferior goods with normal goods due to a change in the price level. Therefore, option b is incorrect.

c.

Substitution effect for inferior goods is stronger than the income effect as consumers will buy more inferior goods in case of a price decrease to compensate for changes in income. Therefore, option c is incorrect.

e.

There is no difference if the substitution effect occurs due to the price changes. Therefore, option e is incorrect.

Economics Concept Introduction

Income effect: Income effect shows the increasing purchasing power of a consumer when there is a change in the price level.

Substitution effect: Substitution effect shows the ability to substitute inferior good with a normal good due to a change in the price level.