Question

Assume that there are only 2 goods, z and y (a) Amanda spends $200 on r and $300 on y when her income is $500. She spends $180 on r and $420 on y when her income is $600. For this income change, characterize the type of each good (necessity, luxury, or inferior). (2) (b) Bill spends $6 on x and $10 on y when his income is $16. He spends $8 on x and $16 on y when his income is $24. For this income change, characterize the type of each good (necessity, luxury, or inferior). (2) (c) Charles spends $3200 on and $800 on y when his income is $4000. He spends $2800 on r and S600 on y when his income is $3400. For this income change, characterize the type of each good (necessity, luxury, or inferior). (2)

Answer 1

a) characterizing the type of each good after income change

1. Necessity goods are those goods whose demand does not change
2. when change in income of the consumer or if changes then it changes slightly.

Inferior goods

• Those goods whose demand decreases when income of person increases and vice-versa.

Luxury good

• Those goods whose demand increases when income of person increases and vice-versa.

Good x

This is an inferior good because increase in income decreases its demand.

Good y

This is a luxury good because increase in income increases the demand of good y.

b) Acoording to bill spends

1. Good x is necessity good while good y is luxury good.
2. Expenditure on good x changes slightly while expenditure on good y changes by large amount.

c) Acoording to charles spends

1. Good x is a luxury good while good y is a necessity good.