For a good, the income effect of a price change works in the opposite direction to the substitution effect but is weaker than it. Which of the following is correct about this good?
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → It is an inferior good, and its demand is still inversely related to its price
Effects in opposite directions mean a rise in purchasing power lowers demand: an inferior good. The substitution effect is stronger, so demand still rises when price falls.
Option (1) It is an inferior good, and its demand is positively related to its price — Incorrect. That needs a stronger income effect.
Option (2) It is a normal good, and its demand is positively related to its price — Incorrect. Here the two effects work in the same direction.
Option (3) It is an inferior good, and its demand is still inversely related to its price — Correct. The stronger effect decides the direction.
Option (4) It is a Giffen good, and its demand is positively related to its price — Incorrect. It needs a stronger income effect.
NCERT (2026-27): “2.4.3 Normal and Inferior Goods … However, there are some goods the demands for which move in the opposite direction of the income of the consumer. Such goods are called inferior goods. …” “A rise in the purchasing power (income) of the consumer can sometimes induce the consumer to reduce the consumption of a good. In such a case, the substitution effect and the income effect will work in opposite directions. The demand for such a good can be inversely or positively related to its price depending on the relative strengths of these two opposing effects. If the substitution effect is stronger than the income effect, the demand for the good and the price of the good would still be inversely related. However, if the income effect is stronger than the substitution effect, the demand for the good would be positively related to its price. Such a good is called a Giffen good.” |