Question

Suppose peanut butter is an inferior good for Ilya and the price of peanut butter rises. What will happen to Ilya's consumption of peanut butter

Answer 1

The substitution effect will cause a decrease in the consumption of peanut butter and the income effect will cause an increase in the consumption of peanut butter.

Step-by-step explanation:

Inferior goods are those whose demand drops as income increases. People tend to prefer other goods but are forced to use the inferior good because of income constraints.

If peanut butter is an inferior good and the price rises substitution effect will tend to cause a decrease in demand and consumption of peanut butter. This is because consumers will seek other alternatives.

Income effect acts in opposite direction to substitution effect, and will cause an increase in consumption of peanut butter.