Question

Consider an economy with two goods, x and y. Explain why if a consumer has well-behaved preferences over bundles of x and y then the two goods cannot both be inferior goods. (Please answer that easy to understand)

Answer 1

Inferior goods are the ones whose demand decreases as the income of the consumer increases. Inferior goods are the ones that have an indirect relationship with the income of the consumers. Suppose an employee who takes a bus to go to work gets a promotion and then he switches from bus to cab. The bus here will be considered as the inferior good since its demand decreased with the increase in income of the consumer.

Well-behaved preferences over bundles of two goods follow the basic assumption of monotonicity of preferences. Monotonicity of preferences means that the consumer always prefers more of a good than less of it, as a greater quantity of goods gives him greater satisfaction. Now, if both the goods are inferior goods then the consumer will want lesser of both the goods when income increases which do not follow the assumption of monotonicity of preferences. Thus at least one of the good should be a normal good so that this assumption is fulfilled (for the well-behaved preferences).

(Normal good is the one whose demand increases as income increases).