A consumer only consumes two commodities, x1 and x2. If x2 is an inferior good, and...

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A consumer only consumes two commodities, x1 and x2. If x2 is an inferior good, and...

A consumer only consumes two commodities, x1 and x2. If x2 is an inferior good, and if p1 rises, do the resulting income and substitution effects on good 2 work in the same direction as each other, or in opposite directions from each other?

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Answer 1

Answer #1

An increase in price of good 1 will increase the relative price of good 1 and decrease the relative price of good 2, which will increases the demand of good 2.

when P1 increases real income decreases and then demand of good 2 increases because good 2 is an inferior good .

Thus demand of good 2 increases due to substitution and income effect and they work in the same direction

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Answer 2

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