Question

3. A. Define inferior good. Give one example. Draw a demand curve for it and fully label the diagram. Why do some people want to pay for it?

B. Define normal good.

C. Return to the demand curve diagram from part A. Imagine that the buyers of this product all have received an income increase. Draw a new demand curve on that diagram to show the change due to the consumer’s income increase. Give one explanation for that change, and label which is the new demand curve. (note: Writing out an explanation is a good general practice for avoiding errors.)

D. Briefly give the definition of insurance that we used in class. Sometimes insurance is an inferior good. Write a scenario that correctly views an insurance policy (auto, homeowners, life, health, etc.) as an inferior good. Explain why this consumer is right to call insurance an inferior good.

Answer 1

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Question:

A). Answer:

Inferior goods are those goods which demand is increase when income decrease and vice-versa. So, demand for inferior goods goes down as income increases and vice-versa. Example: Rice,jowar, potatoes and instant noodles.

The purchasing habits are affected by the income level and consumers behavior. Consumers behavior play an important role in purchasing or buying of goods and services. Normally when income level increase, consumers purchase or spend on more expensive and luxurious items and when income level decrease people spend more on low cost or cheap products. But some time consumers behavior do not change with change in income. Some consumers may not change their behavior, and they continue to purchase inferior goods.

Graph:

B). Answer:

Normal good are those goods which demand is increase when income increase and vice-versa. Example- Luxurious goods like, Car, TV etc.

C). Answer:

When income increase consumer spend less on inferior goods and demand curve shift left from D to D1.

D). Answer:

Insurance is a legal agreement by which a company provide a guarantee of compensation for specified loss, damage, illness, or death in return for payment of a specified premium. Like, Auto insurance, health insurance, property insurance etc. Wealthier individuals can bear the risk better, and invest less in self-insurance with two states of the world. Self-insurance, like insurance, is thus an inferior good. When income level increase its increase the risk bearing capacity of the individuals and they can bear the risk themselves and the don't need of go to have a insurance company for insurance or protection. So, when financial position get strong people's interest to buying the insurance policy decrease and vice-versa. Some time people insured the risk partially not fully because they can bear the loss for the certain amount. It also decrease the demand for insurance.

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