Answer to Question #177441 in Microeconomics for Faeem

Question

5.2. Use the income elasticity of demand to distinguish between a normal good and an inferior good. In your explanation provide the correct elasticity coefficient for each product and the relationship between income and quantity demanded. (4) 5.3. The cross-price elasticity coefficient between Apple and Android is 2,0. Are these goods complements or substitutes? (1)

Answer 1

Normal goods possess an income elasticity demand which is positive. As income increases, extra goods are necessitated at each price glassy. Whereas inferior goods possess an income elasticity of demand which is negative. Thus, as consumers’ income advances, they purchase minimal low-grade goods.

To define whether goods are complements or substitutes, the elucidation is based on the elasticity of cross-price. If the elasticity of cross-price is optimistic then the goods are substitutes, and if the elasticity of cross-price is deleterious then the goods are complements. Therefore, both Android and Apple are substitutes based on the given elasticity of cross price.