Practice question · True or false
The income effect of a price decrease always increases the quantity demanded of the cheaper good.
Hints
- Which effect is unambiguous in sign?
- Inferior goods.
Show the answer
False
Why
False. The substitution effect is unambiguous; the income effect can go either way. A price fall raises real income, and for an inferior good that reduces demand, with a Giffen good the income effect outweighs the substitution effect and the demand curve slopes upward.
Practise Income and Substitution Effects
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