Answer to Question #77533 in Microeconomics for Farah

Question #77533
How would you decompose the total effect of a reduction in the price of an inferior good into the income and substitution effect components? What will happen if the income effect is too large?
Expert's answer
When price of an inferior good falls, its negative income effect will tend to reduce the quantity purchased, while the substitution effect will tend to increase the quantity purchased. But normally it happens that negative income effect of change in price is not large enough to outweigh the substitution effect.
If income effect is too large, then the quantity demanded will decrease.

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Assignment Expert
13.05.19, 16:56

Dear visitor, please use panel for submitting new questions

11.05.19, 20:57

How will a simultaneous increase in the price of substitute good and an improvement in production technology affect market demand and/or supply, equilibrium price and equilibrium quantity in a competitive market.

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