Question

Good 1 and Good 2 are perfect substitutes. Suppose that good 1 is an ordinary good.

a. Should both good 1 and good 2 be normal goods?

b. Should good 2 be an ordinary good?

Explain using income effects and/or substitution effects.

Answer 1

Ans: If Good 1 and Good 2 are perfect substitutes. Suppose that good 1 is ordinary good then:
If Good 1 and Good 2 are perfect substitutes of each other, it means that the properties of both the products are same which ultimately means that the commodities are normal goods.
Yes, when they both are the perfect substitutes of each other, then the characteristics of both of them will resemble each other, therefore, when Good 1 is an ordinary good than Good 2 should also be an ordinary good.
In the income effect is that effect which shows the functional relationship between the income of the consumer and demand of the goods.
Goods are of two types:
Normal goods
Inferior goods
There is a direct relationship between income and demand for normal goods. It means if income increases then the demand for normal goods also increases and vice versa.
There is an inverse relationship between the income of the consumer and the demand of the inferior goods. It means if income increase then the demand for inferior goods decreases and vice versa.
Substitution effect means the decrease in the sales for a commodity which can be attributed to the customers which switch to the cheaper alternatives when the price of such alternatives rise.