Final answer:
It is True that if an Engel curve is downward sloping, then the related good is considered to be inferior, meaning that its demand declines as income increases. The Engel curve reflects income effects, while the downward slope of an indifference curve represents the marginal rate of substitution, maintaining the same level of utility.
Step-by-step explanation:
The assertion that if an Engel curve is downward sloping, one of the two goods must be inferior is True. The Engel curve represents the relationship between a consumer's income and the quantity of a good demanded. A downwardsloping Engel curve indicates that as income increases, the demand for the good decreases, which is the characteristic of an inferior good. In contrast, for a normal good, the Engel curve would slope upwards, reflecting an increase in demand as income grows.
Income effects and income elasticity of demand play crucial roles in these observations. An inferior good has a negative income elasticity of demand, suggesting that higher income leads to a decrease in the demand for that good. When analyzing two goods, if one is revealed to be inferior due to its negative income elasticity, there is no compulsory inference on the income elasticity of the other good; it can be either positive (normal good) or negative (another inferior good).
An indifference curve illustrates the tradeoffs between two goods while maintaining the same level of utility. The downward slope of the indifference curve indicates that, to maintain the same level of utility, if one good's consumption decreases, the other's must increase. This slope reflects the marginal rate of substitution, showing how much of one good a consumer is willing to give up for another while keeping their overall satisfaction constant.