Question

A consumer must spend all of her income on two goods (X and Y). In each of the following scenarios, indicate whether the equilibrium consumption of goods X and Y will increase or decrease. Assume good X is a normal good and good Y is an inferior good.

a. Income doubles.
b. Income quadruples and all prices double.
c. Income and all prices quadruple.
d. Income is halved and all prices double.

Answer 1

Answer:

a. Income doubles

• consumption of good X will increase (normal good) will consumption of good Y will decrease (inferior good)

b. Income quadruples and all prices double.

• consumption of good X will increase (normal good) will consumption of good Y will decrease (inferior good)

c. Income and all prices quadruple.

• consumption of both goods will remain at the same level

d. Income is halved and all prices double.

• consumption of good X will decrease (normal good) will consumption of good Y will increase (inferior good)