With inferior goods (like ramen noodles), the income effect works in the opposite direction from the income effect discussed in the text. If a consumer feels richer, she would buy less of an inferior good. If she feels poorer, more.
a. Suppose that a consumer eats two different foods: potatoes and meat. Potatoes are inferior and meat is a luxury. Describe both the income and substitution effects on the consumer’s optimal choice of potatoes and meat if the price of potatoes were to rise. Put the two effects together. What can you conclude?
b. What if you knew for sure that the substitution effect dominated the income effect? What would happen to the consumer’s optimal choices for potatoes and meat?
c. What if instead you knew that the income effect dominated the substitution effect? What would happen in this case? Why is this result a bit unusual?