Economics (AS & A Level) · May / June 2026 · Paper 33 · Question 4

A consumer spends all of their income on two goods, one of which is a normal good and the other an inferior good. The position of the consumer's budget line is initially at B₁ and utility is maximised at point X on indifference curve I₁. [diagram showing budget lines B₁, B₂, B₃, indifference curves I₁, I₂, point X, and points S, T, U on the inferior good axis] What are the income and substitution effects of a fall in the price of the inferior good?

1. Aincome effect: fall in quantity from U to T; substitution effect: rise in quantity from S to U
2. Bincome effect: rise in quantity from S to T; substitution effect: rise in quantity from T to U
3. Cincome effect: rise in quantity from S to U; substitution effect: fall in quantity from U to T
4. Dincome effect: rise in quantity from T to U; substitution effect: rise in quantity from S to U

As printed in the paper