Question

Suppose that a consumer's preferences are well behaved in that properties 4-1 to 4-4 are satisfied and the initial equilibrium consumption bundle consists of 10 units of X and 25 units of Y. If PY increases such that the new equilibrium consumption bundle is 15 units of X and 10 units of Y, then goods X and Y are:

Answer 1

Normal goods

Explanation:

Initial consumption bundle: X = 10 units and Y = 25 units

After the price of Y rises

So,

The new Consumption bundle is

X = 15, Y = 10

Hence, Good X and Y are normal goods .

As the price of good Y increases, the consumption of good Y decreases from 25 to 15 units as the actual revenue decreases, so the consumption decreases

Although the price of good X stays the same but is now comparatively lower, demand increases mean that consumption increases as real revenue increases.

This indicates that the sales impact is positive, implying that good X and Y are ordinary items.