Detail

7. The graph to the right gives two indifference curves and two budget constraints for a single individual. Due to a loss in income the individual moves from indifference curve U₁ to U₀. From this we know that:

The movement from U₁ to U₀ is the result of a drop in income, yet as a result consumption of good X increases from X_A on the higher budget constraint to X_B on the lower budget constraint. An inferior good is defined as one for which consumption increases as income falls so X is inferior.