Answer to Question #298271 in Microeconomics for garg

Question

Consider a consumer who consumes two goods, X and Y. Show the impact of fall in price

of good Y on the consumption of good Y (i) if good Y is an inferior good (ii) good Y is a Giffen

good.

Answer 1

(i) An increase in the inferior good's Y price means that consumers will want to purchase other substitute goods instead but will also want to consume less of any other substitute normal goods because of their lower real income.

(ii) A Giffen good occurs when a rise in price causes higher demand because the income effect outweighs the substitution effect.