Question

2. Suppose the demand curve for public transportation is downward sloping, and the income elasticity of demand for public transportation is negative.

i. Design an indifference curve-budget line diagram showing the substitution and income effects created when the price of public transportation falls. In your diagram, place public transportation on the horizontal axis and all other goods (prices) on the vertical axis.

ii. How you can tell from your diagram that the income elasticity of demand for public transportation is negative? Is public transportation a normal or an inferior good? Explain

Answer 1