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With inferior goods (like ramen noodles), the income effect works in the opposite direction from the income effect discussed in the text
With inferior goods (like ramen noodles), the income effect works in the opposite direction from the income effect discussed in the text. If a consumer feels richer, she would buy less of an inferior good. If she feels poorer, she would buy more.
What if you knew for sure that the substitution effect dominated the income effect? What would happen to the consumer?s optimal choices for potatoes and meat?
Expert Solution
With the income effect, a consumer will buy less of an inferior good (potatoes) and more of a superior good (meat), as his income rises. As his income falls, he will buy more of an inferior good (potatoes) and less of a superior good (meat).
With the substitution effect, an individual will buy less of a higher priced good and more of a lower priced substitute. If the substitution effect dominates the income effect, assuming potatoes are priced lower than meat, the consumer would choose the lower-priced, inferior good (potatoes), regardless of income level.
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