If the economy goes into a recession and incomes fall, what happens in the markets for inferior goods?

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BlackTom AI · Accepted Answer

Understanding the scenario: a recession causes incomes to drop, which affects consumer demand patterns, particularly for different types of goods. Now let's evaluate each answer choice in turn.
Option A: 'Prices and quantities both rise' — This would imply that a recession with falling incomes leads to higher prices and higher quantities traded for inferior goods. Typically, inferior goods see increased demand when incomes fall, but this option asserts that both price and quantity rise. While quantity demanded for inferior goods tends to rise as people substitute toward cheaper options, prices do not necessarily rise; in fact, prices often fall or stay low due to reduced overall demand and potential excess supply. Therefore this option is inconsistent with standard consumer response in a recession.
Option B: 'Prices and quantities both fall' — This suggests that both price and quantity for inferior goods decrease. The quantity demanded for inferior goods usually increases when incomes fall, not decreases, since people buy more of these cheaper substitutes. A fall in price could occur if there is weak overall demand or increased supply, but the accompanying fall in quantity demanded makes this combination unlikely for inferior goods in a recession. As a result, this option misstates the typical shift in demand and the price behavior.
Option C: 'Prices rise, quantities fall' — Here, the claim is that prices go up while quantities go down. In a recession with lower incomes, demand generally weakens; prices for inferior goods do not typically rise in this context because sellers face diminished purchasing power and may lower prices to attract buyers. This option contradicts the expected direction of demand shift for inferior goods during a recession, making it an unlikely scenario.
Option D: 'Prices fall, quantities rise' — This option aligns with the conventional view: when incomes fall, consumers substitute toward inferior goods, increasing the quantity demanded. If demand rises sufficiently, the market may push prices down due to weaker overall willingness to pay or because suppliers reduce prices to clear higher volumes. Although price movements depend on relative supply, the core effect for inferior goods in a recession is higher quantity demanded, often accompanied by downward pressure on price. This option fits the standard description of inferior goods responding to lower incomes in a recession.
In summary, the intuition behind inferior goods is that demand grows when incomes drop, leading to more units sold (higher quantities). Price behavior can be downward or modestly inelastic in the short run, but the most consistent pair with the inferior-good effect in a recession is falling prices with rising quantities. Consistently evaluating each choice reveals that the remaining option captures this relationship most accurately, while the others contradict the typical demand response or price dynamics observed under reduced income conditions.

ECON 100 001/002/003/004 Markets

If the economy goes into a recession and incomes fall, what happens in the markets for inferior goods?

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ECON 100 001/002/003/004 Markets

If the economy goes into a recession and incomes fall, what happens in the markets for inferior goods?

View Explanation

Log in for full answers

Similar Questions

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More Practical Tools for Students Powered by AI Study Helper

Making Your Study Simpler

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