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Unformatted text preview: however, the results will be different. Why is this true? Consider the case where the price of good A goes up. Income and Substitution Effects with Normal and Inferior Goods The substitution effect makes B relatively cheaper, so consumption of B will increase, and consumption of A will decrease. The income effect makes the buyer feel poorer, and so consumption of A will decrease, but consumption of B will increase. Remember that consumption of an inferior good varies inversely with income: when you are rich, you buy less, when you are poor, you buy more. If the A is still normal and B is still inferior, and the price of A falls, then the substitution effect will cause higher consumption of A and lower consumption of B, and the income effect will cause higher consumption of A and lower consumption of B. Because the buyer now feels richer, they are less inclined to buy the inferior good....
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- Fall '08
- Microeconomics, Inferior Goods