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In the case of inferior goods, the expansion in demand following a price fall takes place only when which condition holds?
ABoth effects are exactly equal to zero
BThe income effect outweighs the substitution effect
CThe substitution effect outweighs the income effect
DThe good has no available substitutes left
Answer & Solution
Correct answer: C. The substitution effect outweighs the income effect
1. For inferior goods, the income effect works opposite to the substitution effect.
2. The substitution effect on a price fall is always positive, raising demand.
3. Net demand rises only if the positive substitution effect is larger.
4. So demand expands only when the substitution effect outweighs the income effect.
_Source: ICAI BoS CA Foundation Paper 4 Business Economics, Ch 2 Unit I "Law of Demand and Elasticity of Demand", p.10_
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