Question

Comparative statics on choice:

a) If your roommate was referred to as an inferior good, I’d like you to unpack that suggestion. What would that mean? Explain with a story / example why this might or might not be the case, paying special attention to the role of the decision maker’s preferences. For a person for whom roommates are an inferior good, is there an associated normal good that goes hand-in-hand with that?

b) If two goods X and Y are complements for me, how would you expect the amount I choose of good X to change when the price of good Y falls? Explain with the use of an example.

Answer 1

Answer a. If the roommate is an inferior good , it meams as the income rises, You demand less of the roommate, in other words your willingness for roommate falls when Income rises.

This tells us that the concerned person enjoys living alone rather than with a roommate.

The associated normal good is living alone. When income rises, you want to live alone more and more.

Answer b.

When price of good y falls, there is a rise in demand for good y and There is a rise in demand for complementary good good x.

Example- Car and petrol, when price of car falls, there is rise in demand for cars.

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