Question

If there are two goods and if income doubles and the price of good 1 doubles, while the price of good 2 stays constant:

A. a consumer's demand for good 1 will increase only if it is a Giffen good for her.

B. a consumer's demand for good 1 will decrease only if it is an inferior good for her

C. a consumer's demand for good 2 will decrease only if it is a Giffen good for her.

D. a consumer's demand for good 2 will increase only if it is an inferior good for her.

E. None of the above

I wonder whether the answer is E, since there is no enough evidence to prove Giffen good. Please show the steps, thank you!

Answer 1

Here the income doubles and the price of good 1 also doubles. while price of good 2 stays same.

Inferior goods demand decreases when income increases.

so here income is increasing and price of 2 is not changing so the demand of 2 will only change if its a inferior good. otherwise income will not have any impact on good 2's demand.

we can not say about good 1 whether its's demand is decreasing due to being it inferior as its price is also increasing so if it is a normal good then its demand can also decrease. so we are not sure here. in option B.

option D is close enough but not correct.. demand of good 2 will decrease if its a inferior good.  since giffen goods are special type of inferior goods. so we can not say about giffen goods.

So the answer here would be option E. None of these.