Question

In: Economics

1. If good Z has an income elasticity of 1.0, then demand for good Z is...

1. If good Z has an income elasticity of 1.0, then demand for good Z is income __________ and the good is __________.

  

inelastic, normal

   

elastic, normal

   

unit elastic, normal

   

inelastic, inferior

   

elastic, inferior

2. If two goods are substitute goods,

  

the price elasticity of demand for both goods will be less than 1.

   

an increase in the price of one will cause a decrease in the demand for the other.

   

the price elasticity of demand for both goods will be greater than 1.

   

an increase in the price of one will cause an increase in the demand for the other.

Solutions

Expert Solution

Ans.1- (C)

An elasticity of 1 is said to be unitary elastic. If income elasticity is positive, then good is a normal good. If income elasticity if negative, then good is an inferior good.

Ans.2- (D)

Suppose A and B are two substitute goods. Then if price of A rises, people will switch from good A to good B and therefore demand for B will rise. Thus, an increase in the price of one will cause an increase in the demand for the other.

Rahul Sunny answered 1 year ago
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