Question

1. a) Consider the case of a consumer with demands over two goods. Prove that it is not possible for both goods to be luxury goods.

b) Demonstrate with a well-labelled diagrammatic example that it is not in general possible to treat aggregate demand as a function of aggregate income. Be clear in your argument - do not simply slap down a picture.

Answer #1

As you can see there are two luxurious goods in the diagram, so it is not possible to both goods be the luxurious goods because:-

- They cannot give the same level of satisfaction to the consumer in the income level.
- And also as the income falls it becomes very difficult to the consumer to have two luxurious goods at the same time.
- Consumer have to sacrifice for one good to have the maximum satisfaction on the other good.
- The luxurious goods demand rises only when the income rises of the consumer and the consumer shifts from normal to luxurious goods as in normal condition's.

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