Question

Homework (Ch 21) 8. Normal and inferior goods Ginny enjoys going to the theater to see plays, and she also enjoys going to rock concerts. The following diagram shows two of Ginny's indifference curves for going to plays and concerts. With Ginny's initial budget constraint (BC), she chose to go to five concerts and five plays per month (point X). Then her budget constraint shifted to BC, and she chose to go to four concerts and four plays per month (point Y). 10 PLAYS I вс, BC 0 10 4 CONCERTS

Answer 1

Ans.

a) Option 2 and 3

A leftwards shift in budget constraint is due to fall in purchasing power of Ginny. This can happen simply due to fall in her income level when prices were constant or due to increase in price of both the goods. As the intercept of the budget line on both the y-axis and the x-axis is calculated as the income divided by the price of the good. So, an increase in price level of both the goods will decrease the intercept on both the x-axis and the y-axis shifting the budget line leftwards.

b) After the shift in budget line due to decrease in real income (or the purchasing power) has lead to decrease in consumption of both plays and concerts, so, both the goods are normal goods as they have positive relationship with the real income.

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