Chapter 46, Problem 2MCQ

To determine

The correct reason for the decrease in the number of inferior goods demand if prices are increased.

Answer to Problem 2MCQ

Option c is correct.

Explanation of Solution

Explanation for the correct option:

c.

Due to the substitution effect, the number of inferior goods demanded will decrease due to an increase in prices. This is because the consumer will purchase another substitute available at cheaper prices. Therefore, option c is the correct answer.

Explanation for incorrect options:

a.

In the Giffen effect, the demand increases with the increase in prices. Therefore, option a is incorrect.

b.

In income effect, a price rise will not decrease the demand as income will also raise. Therefore, option b is incorrect.

d.

The 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 d is incorrect.

e.

There will be a substitution effect only which will decrease the demand for inferior goods if prices will increase. Therefore, option e is incorrect.

Economics Concept Introduction

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

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