Question

2. Esen consumes only two goods, meat and potatoes. His preferences are complete transitive, monotonic and convex. When the price of meat rises, he buys less meat and less potatoes. Based on this information, we can say that a. meat is necessarily a normal good. b. meat is necessarily an inferior good. c. potatoes are necessarily a normal good. d. potatoes are necessarily an inferior good. e. None of the above.

Answer 1

NOTE: Many variants of this question are available. So, please check if the question provided to you is EXACTLY THE SAME as the one given here. For a normal good, an increase in income leads to an increase in the demand for that good and vice versa. However, for an inferior good, there will be a negative relationship between income and demand for a product, i.e., if the income increases, demand falls, and vice versa. Therefore, it is indispensable to find the income effect of the goods to find the answer. From the given information, the income effect of meat cannot be determined since it is not known whether the substitution effect is higher or the income effect of Esen. However, for potatoes, there is only the income effect which can easily be analyzed: when the price of meat rises, lesser potatoes are purchased. However, through substitution effect, more potatoes should have been purchased. Therefore, potatoes are inferior goods due to which an increase in price of other goods is leading to the reduction in demand for potatoes. Therefore, the correct answer is option d. potatoes are necessarily an inferior good.