Question

4. In each case, identify the following good(s) as inferior, normal, substitutes, or complements.

a. The price of good Y decreases and the demand for good Z increases.

b. The income of buyers increases and the demand for good A decreases.

c. The demand for good H increases when the price of good J increases.

d. The price of good X increases and the demand for good B decreases.

e. The demand for good K decreases following a decrease in the income of buyers.

Answer 1

4.

a. The price of good Y decreases and the demand for good Z increases.

Since With the decrease in the price of good Y, the demand for the good Z increases, so it is an example of complementary goods which are used together and in this case, the cross-price elasticity will be negative.

Hence good Y and good Z are complementary goods.

b.

Since the income of buyers increases and the demand for good A decreases, so it is an example of the inferior goods because with the increase in the income of the consumers, he purchases more of normal goods and less of inferior goods.

Hence good A is an inferior good.

(c)

Since the demand for good H increases when the price of good J increases, hence it is an example of substitute goods because in the case of the substitute goods, the cross-price elasticity of the good is positive.

Hence Goods H and J are substitute goods.

(d)

Since when the price of good X increases and the demand for good B decreases. so it is an example of complementary goods which are used together and in this case, the cross-price elasticity will be negative.

Hence good X and good B are complementary goods.

(e) Since the demand for good K decreases following a decrease in the income of buyers. so it is an example of the normal goods because, with the increase in the income of the consumers, he purchases more of normal goods and less of inferior goods.

Hence good K is a normal good.