Nicanor's passion is good wine. If the prices of the other goods are constant, Nicanor's demand for a good Rioja is c = 0.04m – 2p where m is his income, p is the price of Rioja and c is the demand for Rioja bottles. Assume that Nicanor has an income of $10,000 and that the price of a decent bottle of Rioja is $50. If the price of Rioja rises to $60, determine the income effect and the substitution effect on the demand for bottles of Nicanor wine.

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Normal and Inferior Goods

Understanding a normal good and an inferior good is important because it tells us what will happen to demand different products during booms and recessions.