Question

In the case of an inferior good, the income effect :
a. Partially offsets the substitution effect
b. Is equal to the substitution effect
c. Reinforces the substitution effect
d. More than offsets the substitution effect​

Answer 1

Explanation:

a. Partially offsets the substitution effect

Partially offsets the substitution effectb. Is equal to the substitution effect

Partially offsets the substitution effectb. Is equal to the substitution effectc. Reinforces the substitution effect

Partially offsets the substitution effectb. Is equal to the substitution effectc. Reinforces the substitution effectd. More than offsets the substitution effect

Answer 2

In Microeconomics,in the case of inferior goods,the income effect can only partially offset the substitution effect.Hence,the answer in this case would be option a. or Partially offsets the substitution effect.

Explanation:

• As the income of any consumer or buyer increases or relative price of any inferior good decreases,based on the income effect,the demand for any inferior good will usually decrease thereby implying a negative income effect for the inferior goods.
• However,based on the substitution effect,the decrease in the relative price of any inferior good compared to other goods will increase the demand for the consumer or buyer demand for that good thereby increasing its consumption or purchase level.
• Now,in the case of any change in relative price of any inferior good compared to other goods,the income effect is not large or intense enough to outweigh the substitution effect.Therefore,income effect cannot completely offset the substitution effect pertaining to inferior goods.