Question

Mary makes the following choices of X₁ and X₂ when prices and income are as follows:

                   X₁    X₂     P₁   P₂      I

Week 1     10     20      2      1      40

Week 2      12     8      2       2     40

Week 3      20    10      2       2     60

Based on this information we can conclude that

		Mary considers both goods to be normal goods
		Mary considers both goods to be inferior goods
		X1 is a normal good and X2 is an inferior good for Mary
		X1 is an inferior good and X2 is a normal for Mary

Answer 1

Here both the goods X and Y are normal goods because of the following reasons:

i) income has direct relation with quantities demanded:

We observed that as income increases from 40 to 60 while price of both the goods remain constant, quantity demanded of both the goods increases. Thus income effect is positive and goods are normal.

ii) Inverse relation with the prices:

As price of X2 rises from 1 to 2 quantity demanded of good 2 falls from 20 to 8. This shows price elasticity of own good is negative and goods are normal.

Option a is the correct answer.