Question

Evaluate following statement. And provide brief reason. (a) Giffen good is always inferior good. (b) The reason Labor supply curve is back-ward bending is because leisure is inferior good. (c) If income elasticity of a good is positive, the demand holds ‘Law of Demand’. (d) If income effect of a good is negative, the demand increases when the price goes up. (e) You are consuming only Orange and Melon. You know that Melon is necessity good to you. If your income increases by 30%, how much Orange and Melon consumption would change? Provide minimum change or maximum change.

Answer 1

(a) Giffen good is always inferior good: Yes, since for giffen goods the income effect is always negative, which makes all giffen goods as inferior goods

(b) The reason Labor supply curve is back-ward bending is because leisure is inferior good: False, it occurs when the income effect becomes greater than the substitution effect

(c) If income elasticity of a good is positive, the demand holds ‘Law of Demand’: Uncertain. A positive income elasticity means as income increases demand increases, however the law of demand takes price into account and not income

(d) If income effect of a good is negative, the demand increases when the price goes up: Uncertain. A negative income effect means as income increases demand decreases, however price is not taken into account here

(e) You are consuming only Orange and Melon. You know that Melon is necessity good to you. If your income increases by 30%, how much Orange and Melon consumption would change: If Melon is a necessity, an increase in income by 30% would increase melon consumption by 30% max and 15% minimum