Question : Statement 1: Income effect is negative in case of inferior goods.
Statement 2: In case of inferior goods, fall in income leads to decrease in demand for the good.
Option 1: Both statements are true.
Option 2: Both statements are false.
Option 3: Statement 1 is true, and statement 2 is false.
Option 4: Statement 1 is false, and statement 2 is true.
Correct Answer: Statement 1 is true, and statement 2 is false.
Solution : The correct answer is (C) Statement 1 is true, and statement 2 is false.
Statement 1 is true. The income effect refers to the change in quantity demanded of a good in response to a change in consumer's income. In the case of inferior goods, as income increases, the demand for the inferior goods tends to decrease. Consumers may choose to switch to higher-quality substitutes when their income rises, leading to a negative income effect for inferior goods.
Statement 2 is false. In the case of inferior goods, a fall in income actually leads to an increase in demand for the good. Inferior goods are typically lower-priced alternatives to higher-quality substitutes. When consumers' income decreases, they may choose to buy more inferior goods because they are relatively cheaper compared to other options. Therefore, the demand for inferior goods tends to increase when income falls.
Therefore, statement 1 is true, and statement 2 is false.
