Question

Assume that beer is an inferior good. If the price of beer​ falls, then the substitution effect results in the person buying​ ________ of the good and the income effect results in the person buying​ ________ of the good.

Answer 1

Answer:

more

less

Explanation:

Inferior goods are goods whose demand falls when income rises and increases when income falls.

When the price of beer changes, there are two effects that determine the quantity demanded. They are :

1. the substitution effect

2. the income effect

The substitution effect looks at the change in price of a good relative to other goods. When the price of beer decreases, it becomes cheaper relative to other goods. Thus, the demand for it increases.

The income effect looks at how a change in price affects real disposable income. When price of beer reduces, disposable income increases. Because beer is an inferior good, it would lead to a decrease in the demand for beer