Question

2. Critically evaluate the following statements and explain in what way they are true, false, or uncertain. Include written and graphical analysis in your responses.

a. If the price of a good decreases and the quantity demanded increases, this implies that the good is normal.

b. Suppose that Steve consumes only violins and violin bows. For Steve, these goods are perfect complements. When the price of violins increases, there is no substitution effect.

Answer 1

a) Statement is false.

As for a normal goods increase in income  leads to increase in quantity demanded and decrease in income leads to decrease in qaunatity demanded.Normal goods are necessary goods which have a elastic relationship between income and quantity demanded.

b) Statement is true .

As when goods are perfect complements then substitution effect doesnot work. Complementary goods are always demanded in pair and when price rises of single commodity consumer reduce the quantity demanded of both commodity.

In this case violins and violin bows are perfect complement and when price rises for violins quantity demanded for both violins and violins bows decreases. For consumer violins bows are also of no use when they cannot purchase violins anymore.