Question

When the income elasticity of demand for a good is negative, one can correctly conclude that:

total revenue will decrease when the price increases.

the good is a substitute.

the good is a complement.

the good is a normal good.

the good is an inferior good.

As the price is raised along a straight-line demand curve, the demand curve becomes more elastic.

True

False

Income elasticity of demand is expected to be _____.

relatively high for necessities

relatively low for luxuries

negative for most products

positive for most products

zero for most products

Assume that due to unfavorable conditions in a prime honey-producing area, the price of honey increases by 50 percent. The quantity consumed of herbal tea declines immediately by 25 percent. Everything else held constant, the:

cross-price elasticity of demand for herbal tea and honey is positive, and therefore the two goods are complements.

cross-price elasticity of demand for herbal tea and honey is negative, and therefore the two goods are substitutes.

cross-price elasticity of demand for herbal tea and honey is positive, and therefore the two goods are substitutes.

cross-price elasticity of demand for herbal tea and honey is negative, and therefore the two goods are complements.

cross-price elasticity of demand cannot be determined from the information provided.

Answer 1

Q1. Option 5. Because when the income elasticity of demand is negative, with the increase in income the quantity demanded decreases
Q2. Option 2. With the increase in price, the change in quantity is more than the change in quantity at lesser price
Q3. Option 4. As people would demand more goods when income increases
Q4. Option 4. As the increase in price of honey reduces the quantity of herbal tea consumed