Question

1. (a) Tony Starks drops out of art faculty and gets an M.B.A. instead. he stops reading books and drinking coffee. Now he reads the wall street journal and drinks bottled mineral water. Determine either book and coffee are normal or inferior goods based on the income elasticity of demand. elaborate Tony's satisfaction-maximizing choice between the wall street journal and drinks bottled mineral water. Use graphs to support your answer.

(b) Piko Taro consumes two goods: pen and pineapple. Draw a budget line and indifference curve to illustrate Piko's satisfaction-maximizing choice between two goods. Elaborate how Piko responses if the price of pen is given 50% discount. Use graphs to support your explaination including the price effect and income effect.

Answer 1

Answer : a)

In the above diagram no (a) when demand for coffee increases then demand for book reading decreases.

We know that when everything remains same and demand for good changes due to change in income then it is known as income elasticity of demand.

According to income elasticity of demand in figure (a) book reading is inferior good and coffee is normal good as demand for coffee increases and demand for book reading decreases due to income rises.

In figure (b) point A and B are satisfaction maximizing choice . Because both works are done simultaneously.