Question

4. Use the following statements to answer this question:

I. The income-consumption curve for perfect complements is an upward sloping straight line. II. The price-consumption curve for perfect complements is an upward sloping straight line.

A) I and II are true.

B) I is true and II is false.

C) II is true and I is false.

D) I and II are false.

Answer 1

The income consumption curve shows the relationship between income and consumption. This curve is known as the Engel curve.

Normal good is that good which has positive income elasticity. It means with the increase in the income, the quantity demand for the normal good increases.

On the other hand, inferior good has negative income elasticity. It means with the increase in the income, the quantity demand for the inferior good decreases.

When the good x is a normal good, then Engel curve will be upward sloping.

When the good x is an inferior good, then Engel curve will be downward sloping.

The price consumption curve shows the relationship between price and consumption. When the given two goods are perfect complements, the same amount of goods will be consumed by consumers regardless of income and prices. Since the level of consumption remains same, the income consumption curve for perfect complements is the diagonal line passing through the origin point.

Hence statement II is correct but statement I is not correct because income consumption curve shows only normal goods and inferior goods and not about the complements goods.

It means statement II is true and I is false.

Hence option c is the correct answer.