Question

Which of the following statements is true?

a. When a good absorbs only a small share of the typical consumer's income, the income effect explains the demand curve's negative slope.
b. A change in consumption brought about by a change in purchasing power describes the substitution
effect.
c. In the case of an inferior good, the income effect is usually larger than the substitution effect.
d. In the case of an inferior good, the income and substitution effects work in opposite directions.
e. Normal goods and inferior goods differ in regard to the direction of the substitution effect caused by a price increase.

Answer 1

The correct answer is that in the case of an inferior good, the income and substitution effects work in opposite directions, showing opposing responses to price changes.

Step-by-step explanation:

The true statement among the options provided is d. In the case of an inferior good, the income and substitution effects work in opposite directions. This occurs because when the price of an inferior good falls, the substitution effect suggests that consumers will buy more of the good because it has become cheaper relative to other goods. However, the income effect implies that as the consumer's purchasing power increases due to the price decline, they may buy less of the inferior good, opting instead for more expensive substitutes. In normal goods, the income and substitution effects typically work in the same direction, but this is not the case with inferior goods.