Question

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 for the coffee change if the price of tea increase?

Answer 1

1. If wealth increases the demand for inferior good will fall. This will shift the demand curve for the inferior good (Black Tea) to the left. Thus at any given price OP, the quantity of black tea decreases.

2. Pizza and coke are complementary goods as they are consumed together. If the price of Pizza decreases, the demand for coke will increase because the cross elasticity between complement good is negative, which means that as the price of one good decreases the quantity demanded of other good increases.

Tea and coffee are substitutes since they are not consumed together. For the substitutes we have positive cross price elasticity which means that as the price of one good increases the demand for other good increases. Thus when the price of tea increases, the demand for coffee change.