Question

Suppose that demand for beer is given by Qºbeer = 120 – Pbeer + 0.5pwine + 0.81, where I denotes income. Which of the following statements is true? A. Beer is an inferior good and beer and wine are complements. B. Beer is a normal good and beer and wine are substitutes. O C. Beer is a luxury good and beer and wine are complements. D. Demand for beer is unit-elastic since the coefficient of Pbeer is -1. O E. None of the above.

Answer 1

Since two goods which can be used in place of each other, is called substitute goods. There is a positive relation of price of one good and quantity demand of its substitute goods. It means the cross price elasticity of two good is positive.

When the cross-price elasticity demand sign is negative, then both goods will be complementary goods.

Normal good is that good which has positive income elasticity. It means with the increase in the income, the quantity demand for the normal good increases.

As it can be seen in the equation that there is a positive relationship between quantity demand for beer (Qd beer) and income of the consumer (0.8I). Hence beer is a normal good.

Since quantity demand for beer and price of wine are positively related. Hence beer and wine are substitute goods.

Hence option B is the correct answer.