Question:
Suppose there are only two goods A and B, and other things including consumer’s money income remain unchanged. If the price of good A falls and the demand for good B increases, we can conclude that
(1) A is a normal good.
(2) both A and B are normal goods.
(3) A is an inferior good.
(4) B is an inferior good.
(5) B is a normal good.
Correct Answer:
(5)
Answer Explanation:
When the price of A falls, the “substitution effect” pulls consumers away from B and toward A. However, the price drop also increases the consumer’s real purchasing power (income effect). For the overall demand for B to increase despite the substitution effect working against it, the income effect must be strongly positive, meaning B is a normal good.
Topic: Consumer Theory Year: 2017
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