Subject - Economics:

Microeconomics

MCQ - 46-4056

Question:

Which of the following might explain how a price decrease might cause a decrease in quantity demanded and an upward-sloping demand curve?

The good is inferior and the income effect is stronger than the substitution effect.
The good is normal and the income effect is stronger than the substitution effect.
The good is normal and the income effect is weaker than the substitution effect.
The good is normal and the income effect is stronger than the substitution effect.
The good is highly subsidized, creating a large increase in marginal utility per dollar.

Correct Answer: A

Explanation:

Income and substitution effects work in opposite directions for inferior goods. A lower price prompts a substitution effect, increasing quantity demanded of the good. A lower price increases purchasing power, and for an inferior good, it decreases consumption. If the income effect outweighs the substitution effect, we can see an upward-sloping demand curve.

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269 MCQ for effective preparation of the test of Microeconomics of Economics section.

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