1) Choose whether this statement is true or false and explain please a. In a two-good...
1) Choose whether this statement is true or false and explain
please
a. In a two-good world if one good is an inferior good the other
good must be a luxury.
b. When the price of a good changes, the substitution effect can be
found by comparing the equilibrium quantities purchased on the new
budget line and a hypothetical budget line that is a shift back to
the original indifference curve parallel to the new budget
line.
c. A Giffen good must be an inferior good and all inferior goods
are Giffen goods.
Homework Answers
a) True
For an inferior good, if price decreases, its demand will
increase.
Suppose that both goods are inferior. So, if the price of both
decreases, both of their sales increases, which is not
possible.
Thus, if one good is inferior, the other must be a luxury.
b) False
When the price of a good changes, the substitution effect can be found by comparing the equilibrium quantities purchased on the original indifference curve when faced with the original prices and when faced with new prices.
c) False
The inverse is true. That is, all giffen goods are inferior but all inferior goods are not giffen.
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1) Choose whether this statement is true or false and explain
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