Answer to Question #243776 in Microeconomics for Kira

Question

The following is intended to explore what kinds of own-price demand relationships

are logically possible in a two-good model with exogenous income (unless

otherwise specified).

For each of the following, indicate whether the relationship is possible or not and

explain:

1. Tastes are homothetic and the own-price demand relationship is positive.

2. A good is inferior and its own-price relationship is negative.

3. In a model with endogenous income, a good is normal and its own-price

demand relationship is negative.

4. In a model with endogenous income, a good is normal and its own-price

demand relationship is positive. Provide a graphical representation.

Answer 1

1. possible - if tastes are homothetic, then all goods are normal goods whose increase in demand is associated with an increase in income.
2. Possible- an inferior good will have negative income elasticity since if the percentage change in income is positive, the percentage change in quantity will be positive and vice versa.
3. Not possible - a normal good experiences an increase in its demand due to a rise in consumers' income implying that the income elasticity of demand is positive.
4. Possible - the demand for normal goods increase as consumers income and purchasing power increases. A normal good is defined as having an income elasticity of demand that is positive.