Your Answer.
FALSE. In case of inferior goods, law of demand fails only when negative income effect is greater than substitution effect. When negative income effects is less than substitution effect law of demand does not fail.

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The law of demand states that the quantity demanded of a good or service varies inversely with its price, all other things being equal. In other words, as the price of a good or service increases, the quantity demanded decreases, and vice versa. However, this law does not hold true for inferior goods. This response will explain why the law of demand fails in the case of inferior goods.



Inferior goods are goods for which demand decreases as consumer income increases. These goods are typically of lower quality or are viewed as less desirable. Examples of inferior goods include generic brands, fast food, and public transportation.



The reason the law of demand fails for inferior goods is due to the income effect. The income effect is the change in demand for a good or service due to a change in a consumer's purchasing power. When a consumer's income increases, they have more purchasing power and can afford to buy higher quality goods. As a result, they will decrease their demand for inferior goods and increase their demand for superior goods. Conversely, when a consumer's income decreases, they have less purchasing power and will be more likely to buy inferior goods.



For example, suppose a consumer typically purchases generic brand cereal because it is cheaper than name brand cereal. If the price of generic brand cereal increases, the consumer will likely decrease their demand for that cereal and switch to name brand cereal or another alternative. However, if the consumer's income increases, they may choose to purchase name brand cereal instead, regardless of the price of generic brand cereal. This is because they now have more purchasing power and can afford the higher quality product.



In conclusion, the law of demand fails for inferior goods because the relationship between price and quantity demanded is not always inverse. As consumer income increases, demand for inferior goods typically decreases, regardless of the price of the good. As a result, the income effect plays a significant role in determining the demand for inferior goods.