Question

1. a) Consider the case of a consumer with demands over two goods. Prove that it...

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.

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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:-

  1. They cannot give the same level of satisfaction to the consumer in the income level.
  2. And also as the income falls it becomes very difficult to the consumer to have two luxurious goods at the same time.
  3. Consumer have to sacrifice for one good to have the maximum satisfaction on the other good.
  4. 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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