Question

2. Identifying normal, inferior, and Giffen goods The green line BC, on the following graph represents your initial budget constraint for good X and good Y, and point A represents the optimal consumption choice, given this choice set. Suppose the price of good X dropped by 50%. The compensated budget is parallel to BC2, representing the same tradeoff between good X and good Y, and it is tangent to the given indifference curve (U) at point B. On the following graph, use the blue points (circle symbol) to plot your new budget constraint BC. Use the grey points (star symbol) to plot the compensated budget. Use the purple point (diamond symbol) to show the substitution effect and the orange point to show the income effect. O BC₂ Compensated Budget GOODY Substitution Effect Income Effect New Optimal Bundle GOOD X Suppose point with coordinates (2, 4) represents the new optimal consumption choice.

Answer 1

Good & normal is a good ca

As shown in diagram we know that quantity demanded for good x increased when it's price falls. And this is a characteristic of normal goods in other words when price of a normal good decreased it quantity demanded will increase.

So we can conclude that good X is a normal good