Question

Can an increase in the price of cheese possibly induce a consumer to buy more cheese? Explain.

Short answer

The increase in the price of cheese will induce the consumer to buy more cheese when the cheese is an inferior good.

Step-by-step solution

Income effect and substitution effect

The income effect states the change in real income with the price change. If the price increase, then real income falls. The substitution effect says that a rational consumer chooses a cheaper good when the price of the good increases. Thus, the demand for the good whose price increased should decrease.

The income effect implies a decline in real income due to increased prices; this should mean greater demand for inferior goods and reduced demand for normal goods.

Reason for increase in demand with an increase in the price of cheese

If cheese is an inferior good, the negative income effect can result in an increased demand even if the price of cheese increases. The inferior good consumption rise with the fall in real income, as stated in step 1. The income effect is greater than the substitution effect, and, hence, the demand for cheese increases.