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Chapter 6: Q.15 (page 152)

Income effects depend on the income elasticity of demand for each good that you buy. If one of the goods you buy has a negative income elasticity, that is, it is an inferior good, what must be true of the income elasticity of the other good you buy?

Short Answer

Expert verified

It must be true of the income elasticity of the other good if buy one of the consumed commodities has a negative income elasticity (poor quality), the other must have a positive income elasticity (normal good). We also know that if a consumer's income improves, he or she will likely consume more of the typical product while consuming less of the inferior commodity.

Step by step solution

01

Definition

Income Elasticity: The ratio of change in quantity demanded to change in income is known as income elasticity.

02

Explanation

Regardless of whether real income falls or rises, the pattern of quantity demanded of goods and services will alter.

Below is the income elasticity of the demand equation.

Incomeelasticityofdemand=%changeinquantitydemanded%changeinincome

03

Conclusion

Therefore, The equation is almost always positive, indicating that as income rises, so does the quantity needed.

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Most popular questions from this chapter

As a college student you work at a part-time job, but your parents also send you a monthly 鈥渁llowance.鈥� Suppose one month your parents forgot to send the check. Show graphically how your budget constraint is affected. Assuming you only buy normal goods, what would happen to your purchases of goods?

1. Jeremy is deeply in love with Jasmine. Jasmine lives where cell phone coverage is poor, so he can either call her on the land-line phone for five cents per minute or he can drive to see her, at a round-trip cost of \(2 in gasoline money. He has a total of \)10 per week to spend on staying in touch. To make his preferred choice, Jeremy uses a handy utilimometer that measures his total utility from personal visits and from phone minutes. Using the values in Table 6.6, figure out the points on Jeremy鈥檚 consumption choice budget constraint (it may be helpful to do a sketch) and identify his utility-maximizing point.

Mr. Burns buys only lobster and chicken. Lobster is a normal good, while chicken is an inferior good. When the price of lobster rises, Mr. Burns buys

  1. less of both goods.

  2. more of lobster and less chicken.

  3. less lobster and more chicken.

  4. less lobster, but the impact on chicken in ambiguous.

Marge buys pizza for \(10 and Pepsi for \)2. She has income of \(200. Her budget constraint will experience a parallel outward shift if.

a. the price of pizza falls to \)5, the price of Pepsi falls to \(1 and her income falls to 100.

b. the price of pizza rises to \)20, the price of Pepsi rises to \(4 and her income remains the same.

c. the price of pizza falls to \)8, the price of Pepsi falls to \(1 and her income rises to \)240.

d. the price of pizza rises to 20, the price of Pepsi rises to \(4 and her income rises to \)500.

At two points on an indifference curve,

a. the consumer has the same income.

b. the consumer has the same marginal rate of substitution.

c. the bundle of the goods cost the consumer the same amount.

d. the bundle of goods that yield the consumer same satisfaction.
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