Question

(Figure: Good Y and Good XI) Given the change in the budget constraint, which of the following statements is TRUE? Units of good Y 10 U BC BC2 0 1 2 3 4 5 6 7 8 9 10 Units of good X O Good X is an inferior good. Good X and good Y are complements. The demand curve for good Y has shifted inward. The demand curve for good X has shifted outward.

Answer 1

The correct option is the option number IV) because :

The shift shown in the budget is because of the increase in price of good Y. Because of this Substitution Effect of increase in price of good Y there's an increase in quantity of good X consumed. Therefore we can't comment on nature of good X as we don't know about the behavior of good X as price of X changes.

Good X and Y can't be complements because as seen in the diagram, the Consumer Substitutes away from good Y to good X as price of Y increases.

There can't be a shift in the demand curve for Y due to a change in price of Y. Such changes involve movement along the demand curve and not the shift of demand curve.

There is a shift in the demand curve for X. It is true because for every given price of X, there is now more demand for X as price of Y has increased. Since there's a change in factors other than price or quantity of X, there will be a shift in the demand curve of X and the shift will be outward as the quantity of X increases at every given price of X.

Hence last option is the correct answer.