Question

Suppose an individual has preferences over x and y, and both goods are normal goods for the individual. Demand is homogeneous of degree 0 in prices and income. Which of the following elasticities can possibly be true?

(a) E1,p3 = -0.4, E1,Py = 0.2, E1,I = 1

(b) E2,p2 = -0.6, E2,Py = -0.4, E2,I = 1

(c) E1,p2 = -1.2, E1,Py = 0.2, E1,I = 1

(d) E1,p2 = 0.2, E1,Py = 0.3, E1,I = 0.5

Answer 1

All of the given elasticities can be true depending on personal preferences and utility. Normal goods have positive income elasticity, which may be less than or greater than one. Option (C) is correct.

Step-by-step explanation:

All of the given elasticities can be true depending on the individual's personal preferences and the total and marginal utility they receive from consuming the goods. When income increases, it is common for individuals to purchase more of both goods, while a decrease in income often leads to a decrease in the quantity consumed of both goods.

Normal goods are those that have a positive income elasticity, and they can be further categorized into two types: those with an income elasticity of less than one and those with an income elasticity greater than one.

Income elasticity of demand is an economic measure of how responsive the quantity demanded for a good or service is to a change in income. The formula for calculating income elasticity of demand is the percentage change in quantity demanded divided by the percentage change in income.

A normal good has an income elasticity of demand that is positive, but less than one. If the demand for blueberries increases by 11 percent when income increases by 33 percent, then blueberries have an income elasticity of demand of 0.33, or (11/33).