Question

7. “A decrease in the price of crude oil leads to an increase in total spending on gasoline.” Is the demand for gasoline elastic or inelastic? Explain in detail with a diagram.

8. Suppose income goes down. Draw a diagram where X is a normal good and Y is an inferior good.

9.Suppose income goes down. Draw a diagram where X is an inferior good and Y is a normal good

Answer 1

7) Decrease in the price of crude oil leads to increase in total spending on gasoline which means consumers raises its demand when price falls which makes crude oil a luxury good. Elasticity of demand of luxury good is elastic.

Elasticity is calculated as %change in quantity demanded / %change in price

If %change in quantity demanded > %change in price, demand is elastic which we can see in the diagram below.

8) Consumer consumes more of inferior good when income goes down and less of normal good.

If income goes down, demand of normal good fall from X0 to X1 and demand of inefrior good Y rises from Y0 to Y1.

9) Consumer consumes more of inferior good when income goes down and less of normal good.

If income goes down, demand of inferior good rises from X0 to X1 and demand of normal good Y fall from Y0 to Y1.