If the demand for good X is QdX = 10 + aX PX + aY PY...

If the demand for good X is Q_d^X = 10 + a_X P_X + a_Y P_Y + a_MM. If M is the income and a_M is positive, then:

Goods y and x are complements
Good x is an interior good
Goods y and x are not related goods
Goods y and x are interior goods
Good x is a normal goods

Expert Solution

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.

Cross-price elasticity of demand= % change in the quantity demand/ % change in the price

When the cross-price elasticity demand sign is positive, then both goods will be substitute goods.

The price of substitute goods and demand for its substitute goods are positively related.

When the cross-price elasticity demand sign is negative, then both goods will be complementary goods

The price of complement goods and demand for its complement goods are negatively related.

As it has been given that if the demand for good X is Q_d^X = 10 + a_X P_X + a_Y P_Y + a_MM. If M is the income and a_M is positive, then good x is a normal good. This is because income of the consumer and quantity demand for x is positively related.

Hence option e is the correct answer.

Rahul Sunny answered 1 year ago

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