Good X is a normal good because the income effect is illustrated by a decrease in quantity demanded as real income decreases when the price rises from po to p₁. c. Is Good Y a normal or an inferior good? Explain. Good Y is an inferior good because the income effect is illustrated by an increase in quantity demanded as real income decreases when the price rises from po to p₁. d. For each of Goods X and Y, explain whether the income effect is working in the same direction or the opposite direction as the substitution effect. For Good X, the income effect is working in the same direction as the substitution effect because the change in quantity demanded from Q to Q₁ is in the same direction as the change in quantity demanded from Qo to Q. For Good Y, the income effect is working in the opposite direction as the substitution effect because the change in quantity demanded from Q* to Q₁ is in the opposite direction as the change in quantity demanded from Qo to Q*. e. For Good Y, how large would the income effect need to be for this to be a Giffen good? What would the demand curve look like in this case? The income effect would need to be more than . In this case, the demand curve would be Price Price P₁ Por- P₁ Po Q₁ Good X Quantity Good Y 20 Quantity For Good X, the income effect is working in the Q₁-Q* Qo Qo-Q* Q₁ effect. Qo-Q₁ s the substitution effect because the manded from Q* to Q₁ is in the s the change in quantity demanded Good Y, the income effect is working ction as the substitution effect n quantity demanded from Q* to direction as the change in quantity ›Q*. rge would the income effect need to en good? What would the demand case? uld need to be more than Q₁-Q. In this case, the demand curve would be upward-sloping Price P1 Pot Q₁ d ♂ Q* Hoo
