Question

3) (4pts. Consider a consumer who spends all his income on two goods, say 804 that good 1 is an inferior good at the current prices and income). If the price and also the income of the consumer doubles, how does his demand for good at all. Explain. all his income on two goods, say good 1 and good 2. Assume ces and income). If the price of both goods double w does his demand for good 1 change, if it changes 4) (5pts.) Consider a consumer whose preference satisfies all the assumptions we stated in class (com- pleteness, transitivity, monotonicity, and decreasing marginal rate of substitution) and also has smooth indifference curves. We are told that the consumer prefers the bundle (1,3) to the bundle (2,2). With this much information, can we say anything about the how the consumer compares the bundles (1,3) and (3.1) (are we able to state which one he likes more)? Explain your reasoning.

Answer 1

3) Inferior goods are those goods whose demand decreases with increase in income.

When the income of consumer increases he shifts his consumption from inferior to normal good as his purchasing power increases with increase in income.

With increase in the prices real purchasing power of the consumer decreases, so he will consume less of the inferior good.

Both of the above arguments show that demand of the inferior good will fall.

4) Monotonicity means consumer always prefer that bundle which has either more of one good and no less of the other.

In this case the consumer prefers that bundle which has more of y- commodity and less of x- commodity which means he strictly prefers y to x.

So, we can say that the consumer will prefer that bundle which has more of y which is in the 1st bundle as it has 3 units of y in comparison with 2nd bundle which has only 1unit of y.