For Sarah, meals at McDonald’s are an inferior good. When the price of meals at McDonald’s increases, Sarah buys less McDonald’s meals. This means that:

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First, restating the scenario helps clarify the logic: Sarah views McDonald’s meals as an inferior good, and when the price of these meals rises, she ends up buying less of them. We need to parse what this says about substitution and income effects.
Option a: The substitution effect of the price change is larger than the income effect. This is consistent with consumer theory: a price rise causes people to substitute away from the now-more-expensive good toward relatively cheaper alternatives (the substitution effect), which typically reduces quantity demanded. For an inferior good, the income effect would push in the opposite direction (higher price reduces real income and, because the good is inferior, this could increase quantity demanded). If the observed change is a decrease in quantity demanded, it implies the negative substitution effect dominates the (potentially positive) income effect. Thus the substitution effect is larger in magnitude than the income effect.
Option b: The income effect of the price change is larger than the substitution effect. Given that the good is inferior, the income effect would tend to increase quantity demanded when the price rises (since real income falls and inferior goods attract more consumption). However, the observed response is a decrease in quantity demanded, which would require the substitution effect to be stronger in magnitude and negative to dominate the income effect. Therefore, this option contradicts the observed behavior.
Option c: Both the income and substitution effects cause Sarah to buy more McDonald’s meals. This would imply a rise in quantity demanded due to both channels, which is inconsistent with the fact that the price increase leads to fewer meals purchased. Hence this option misstates the direction of one or both effects.
Option d: Sarah must be behaving irrationally in her choice of McDonald’s meals. Economic analysis of substitution and income effects does not require irrationality to explain the outcome; the standard framework can account for the observed decrease in quantity via a stronger substitution effect. Labeling it irrational would be unwarranted and unnecessary given the theory.

For Sarah, meals at McDonald’s are an inferior good. When the price of meals at McDonald’s increases, Sarah buys less McDonald’s meals. This means that:

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For Sarah, meals at McDonald’s are an inferior good. When the price of meals at McDonald’s increases, Sarah buys less McDonald’s meals. This means that:

View Explanation

Log in for full answers

Similar Questions

Sarah usually buys 5 cups of coffee and 2 muffins every day. The price of coffee falls significantly. Explain how the substitution effect and the income effect influence Sarah’s decision to buy more coffee.

If a good is normal and its price increases,

Which of the following occurs simultaneously with an income effect?

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More Practical Tools for Students Powered by AI Study Helper

Making Your Study Simpler

Rose is allocating her budget between two goods—Apples and Bananas; both are normal goods. If the price of apples increases from $1 per pound to $2 per pound, then the income effect causes her to buy _of apples and the substitution effect causes her to buy_ of apples.