Question

In the answer to Demonstration Problem 4–2 in the text, we showed a situation in which a gift certificate leads a consumer to purchase a greater quantity of an inferior good than he or she would consume if given a cash gift of equal value. Is this always the case? Explain?

Short answer

Yes, the consumer tends to buy a greater quantity of an inferior good if given a gift certificate than a cash gift.

Step-by-step solution

Term Description

Gift Certificate:These certificates are one kind of alternative to gifts. The consumer can buy that particular commodity at a certain price from the store where he purchased the certificate.

Cash gift:Here, the consumer gains a certain amount of cash and thus uses it to buy any commodities that would increase his utility.

Gift certificate for an inferior good:

Attaining a cash gift would increase the consumer's income, reducing the consumption of inferior goods. In such a case, the consumer will buy other commodities that maximize utility rather than inferior goods after receiving the cash. Thus, decreasing the number of inferior goods consumed.

Whereas, if the consumer is provided with a gift certificate for an inferior good without giving a cash gift, then the consumer would maximize its consumption of the inferior goods. As the consumer cannot attain utility from other commodities from that gift certificate, he will choose to consume the inferior good in greater quantity