Question

If bread is an inferior good and if the price of bread increases, the income effect _____ the quantity demanded, and the substitution effect _____ the quantity demanded.

Answer 1

The income effect would increase the quantity demanded of an inferior good like bread when the price rises, while the substitution effect would decrease the quantity demanded since bread has become relatively more expensive.

Step-by-step explanation:

The student's question involves understanding the interplay of the income effect and substitution effect when there is a change in the price of a good, specifically an inferior good like bread. The income effect in economics refers to the change in quantity demanded due to the effect of a change in the price on a consumer's real income or purchasing power. The substitution effect refers to the change in the quantity demanded of a good due to a relative price change, which makes the good more or less expensive relative to other goods. In the context of an inferior good such as bread, if the price of bread increases:

• The income effect would increase the quantity demanded.
• The substitution effect would decrease the quantity demanded.

Regarding an inferior good, as the price of bread rises, individuals feel poorer, which means they might buy more of the inferior good (more bread in this case) because they cannot afford the more luxurious substitutes. However, the substitution effect would lead consumers to buy less bread because it has become relatively more expensive compared to other goods.

Answer 2

increases

decreases

Step-by-step explanation:

Whenever the price of a commodity that is perceived as an inferior good rises, because of its negative perception, it tends to now become a bit of a luxury good; and the income effect will tend to increase the quantity purchased (because when you have more income you can afford more expensive goods), while the substitution effect (which is the propensity of consumers switching to cheaper substitutes because of rise in price) will tend to reduce the quantity purchased.

Therefore, If bread is an inferior good and if the price of bread increases, the income effect increases the quantity demanded, and the substitution effect decreases the quantity demanded.