Are luxury good inferior goods? Why lower price luxury goods will not attract people? Can you...

Are luxury good inferior goods? Why lower price luxury goods will not attract people? Can you use graph to explain?

Expert Solution

Luxury goods are ones whose demand increases more than proportional to the increase in income of the consumers. It is not an inferior good. Rather, it is the opposite of an inferior good whose demand falls with an increase in consumer's income. Thus, luxury good is just like a normal good, i.e. an increase in income causes its demand to increase. But, normal goods are not luxury goods because of the price effect.

If price of normal good falls, its demand would increase because it is cheaper and consumers will derive more utility. But, if price of luxury good falls then its demand will also fall. The reason behind this is that a cheap luxury good is no more luxurious to its consumers. The luxury is embedded in the fact that the good is expensive. Eg: A Rolex is a luxury good because I can show it off. If I simply had to see the time, why would I buy a Rolex? And if Rolex is now cheaper, I no more derive any utility from showing it off and I will not demand it anymore :)

Thanks!

Rahul Sunny answered 6 months ago

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