Question

Determine whether the following statements are true or false and explain why.

a. An upward sloping demand curve implies a downward sloping Engel curve.

b. In a world with only two goods, good A and good B, if the Engel curve for good A is downward sloping, then good B is a normal good for sure.

Answer 1

a.

True

An upward sloping demand curve is when the good is a giffen good. Giffen goods are the ones whose demand increases as price of the good increases. That's why the demand curve is upward sloping because for giffen goods, the price and the quantity demanded have a positive relation.

We know that all giffen goods are inferior goods. Inferior goods are the ones whose demand decreases as income increases. Since an engel curve represenst the consumption level at differnt income levels, the engel curve for an inferior good is backward bending or downward sloping.

Thus, an upward sloping demand curve implies a downward sloping engel curve.

b.

True

In a world where there are only two goods A and B, both cannot be inferior goods. If one is an inferior good, another one has to be a normal good. We are given that the engel curve for good A is downward sloping, which means that as income increases, the quantity purchased of good A decreases. This clearly shows that the good A is an inferior good. Thus, the other one has to be a normal good.

Note: In a worls where there are only two goods, both of them cannot be inferior goods because when the income of a person increases, lesser quantity of both goods will be consumed, which is impossible in reality.