Question

Only two goods x and y, are available. The price of x increases (but the price of y and income stay the same). It's seen that the quantity of x increases and the quantity of y decreases. Standard preferences (e.g monotonicity) apply.

a. Is good x a normal good, inferior good, or can’t tell? Explain.

b. Is good y a normal good, inferior good, or can’t tell? Explain.

c. Is good x a complement to good y, a substitute for good y, or can’t tell? Explain.

Answer #1

a. **x is an inferior good**

The price of x has increased and as a result, quantity of x has increased. The demand for x has a positive relationship with the price. So, x is a giffen good. All giffen goods are inferior goods. So, x is an inferior good.

b. **y is a normal good.**

The price of x has increased and income has stayed constant. It means that the purchasing power of the individual has decreased. It means the real income has fallen.

Real income has decreased and demand for y has decreased. Therefore, y is a normal good.

c. **x is a substitute for good y.**

As a result of price change, the individual decreases the consumption of y and increases the consumption of x. It means that x is being substituted for y.

So, x is a substitute for y.

Which of the following is true for Beta Company with demand
function for its product X, “QX = 1000 – 5PX - 0.03I + 0.2PY,”
where QX = quantity of X sold, PX = price of X, I = consumers’
average income, and PY = price of product Y?
a) X is an inferior good and a substitute to good Y.
b) X is an inferior good, and a complement to good Y.
c) X is a normal good, and...

The utility function U(X,Y)=XaY1-a where
0≤a≤1 is called the Cobb-Douglas utility function.
MUx=aXa-1Y1-a
MUy=(1-a)XaY-a
(note for those who know calculus
MUx=∂U∂x and
MUy=∂U∂y)
Derive the demand functions for X and Y
Are X and Y normal goods? If the quantity of the good increases
with income a good is a normal good. If the quantity decreases with
income the good is an inferior good.
Describe in words the preferences corresponding to a=0, a=1,
a=.5

a. There is only two types of goods, black tea and green tea.
Green tea is normal good while black tea is inferior good. What
will happen to the demand of black and green tea if the consumers’
wealth increased suddenly? Show it on the demand graph.
b. Is Pizza and Coke substitute goods? What will happen to the
demand of Coke if the price of Pizza decrease? How about tea and
coffee, substitute or complement goods? How the demand...

As the price of a frozen banana decreases from $2 to $1,
quantity demanded for ice cream sandwiches increases from 80 to
100. Therefore a frozen banana is a/an _____________ to ice cream
sandwiches.
a) Normal good
b) Giffen good
c) Inferior good
d) Complement good
e) Substitute good
f) There’s always money in the banana stand

Consider two goods, x and y. With the quantity of Y on the
vertical axis and the quantity of x on the horizontal axis, a
negatively sloped price- consumption curve implies that
A. x and y are inferior goods
B. x and y are normal goods
c. x and y are substitutes in consumption
d. x and y are complements in consumption

If the cross-price elasticity for two goods is equal to
−4, then
A) the goods are normal goods.
B) the goods are inferior goods.
C) the goods are substitutes.
D) the goods are complements.
If the supply curve for housing is perfectly inelastic,
a decrease in demand will cause the equilibrium price
to:
A) rise and the equilibrium quantity to fall.
B) rise and the equilibrium quantity to stay the same.
C) fall and the equilibrium quantity to fall.
D)...

If goods X and Y are substitute goods, then the cross-price
elasticity of the price of good Y on the demand
for good X is:
Select one:
a. positive
b. zero
c. undefined
d. negative

Suppose that a consumer consumes
only two goods, coconuts and bananas. Suppose that the price of
bananas increases.
A) Explain the direction of the income effect and substitution
effect for both goods if both goods are normal goods.
B) What we say about the total change in the consumption of
bananas if a banana is an inferior good?

3. Make a diagram illustrating the effect of a change in price
on a consumer’s optimal choice of goods x and y. Assume each
consumer has well behaved preferences, that no consumer has kinky
preferences, and that the optimal consumer choice will always be an
interior solution
a. The price of good one decreases. Assume both x and y are
normal.
b. The price of good one decreases. Assume good x is inferior
and nongiffen.

2. Jerome consumes only two goods, eggs and beans. His
preferences are complete, transitive, monotonic and convex. When
the price of beans rises, he buys fewer eggs and the same amount of
beans. Based on this information, we can say that
a. Beans are necessarily normal and eggs are necessarily
inferior. b. Beans are necessarily inferior and eggs are
necessarily normal. c. We can only conclude that beans are
necessarily normal. d. We can only conclude that eggs are
necessarily...

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