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Suppose that a consumer's preferences are well behaved in that properties 4-1 to 4-4 are satisfied...

Suppose that a consumer's preferences are well behaved in that properties 4-1 to 4-4 are satisfied and the initial equilibrium consumption bundle consists of 100 units of X and 50 units of Y. If PX decreases such that the new equilibrium consumption bundle is 150 units of X and 75 units of Y, then goods X and Y are: substitutes, complements, unrelated, or inferior? Explain your reasoning.

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Answer #1

As Px decreased, more of X was consumed (by law of demand). As more of X is consumed , the amount of Y consumed also increased. As price decreased of X, it increased the quantity consumed of Y, the cross price elasticity (percent change in Y/percentage change in Px) will be negative. This indicates that the two goods are complementary in nature.

Had they been substitutes, less of Y would be consumed. Also they are not inferior because demand of the goods increased as real income (due to fall in Px) rose.

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