Chapter 46, Problem 2FRQ

a.

To determine

To define: The impact on quantity demanded due to substitution effect if prices of an inferior good increases.

Explanation of Solution

Due to substitution effect customers will shift to another substitute if prices of the product will increase. This increase in price will decrease the quantity demanded.

Economics Concept Introduction

Demand and Supply: Demand refers to the curve that depicts the relationship between the quantity demand at given price whereas supply refers to the curve that depicts the relationship between the quantity that supplier is ready to sell at given price.

Price elasticity of demand: The relationship between the change in demand due to change in price is referred as price elasticity of demand.

b.

To determine

The impact on change in quantity if income effect prevails.

Explanation of Solution

If income increases, then real income will decrease if prices of the inferior goods increase. This is because; people will buy inferior goods at increased price. This will also increase the quantity demanded.

Economics Concept Introduction

Price elasticity of demand: The relationship between the change in demand due to change in price is referred as price elasticity of demand.

c.

To determine

The relative size of income or substitution effect for inferior goods if demand curve slopes downward.

Explanation of Solution

Usually, substitution effect is more than income effect. But in case if income effect is superior to substitution effect then demand of the product will increase and demand curve will slope upward.

Downward slope of demand curve depicts that the demand is decreasing with the increase in the price.

Economics Concept Introduction

Price elasticity of demand: The relationship between the change in demand due to change in price is referred as price elasticity of demand.