A Consumer's bundle includes goods X and Y, where good X is an inferior good, and...

A Consumer's bundle includes goods X and Y, where good X is an inferior good, and good Y is a normal good. According to (and only focusing on) the income effect ( and ignoring all other effects) the impact of a price decrease of good X will be a ____________

a. substituting consumption away from Y to good X

b. decreased consumption of X

c. Increased consumption of X

Expert Solution

Correct option of above question is (b).

Since we have given that a consumer's bundle includes goods X and Y, where good X is an inferior good, and good Y is a normal good. And we have to focus only on income effect and ignoring all other effects.

As, inferior goods are those goods which has negative income effect. In other words increase in income leads to decrease in demand for that good.

So by ignoring all other effects if the price of the good x decreases it leads to increase in income of consumer. Since good x is inferior good ,the impact of a price decrease of good X will be a decreased consumption of X.

Rahul Sunny answered 2 years ago

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