(a)
To explain:
The impact on demand for goods X due to fall in income.
Answer to Problem 1CACQ
There will be fall in demand of goods X.
Explanation of Solution
There is a leftward shift in demand curve. This is because when there is decrease in income, it leads to fall in demand. This is because the commodity is normal goods. So, there is a positive relation between demand and income.
In the below diagram, DD is the initial demand curve and P is the price line. As income falls, it leads to leftward shift of demand curve from DD to D1. Quantity falls from Q to Q1.
Figure 1: Decrease in the income of consume shifts demand curve leftwards
Thus, when income of the consumer decreases, the demand of goods X decreases from Q to Q1 keeping price of goods X fixed.
Normal Goods:
The goods are said to be a normal goods when there is a positive relation between income and demand of a commodity.
Inferior goods:
The goods are said to be inferior goods when there is an inverse relation between income and demand of a commodity.
(b)
To explain:
The impact on demand for goodsY due to increase in income.
Answer to Problem 1CACQ
There will be fall in demand of goodsY.
Explanation of Solution
There is a leftward shift in demand curve. This is because when there is increase in income, it leads to fall in demand as goods is an inferior goods. So, there is an inverse relation between demand and income, thus decreasing the demand of inferior goods.
In the below diagram, DD is the original demand curve, P is the initial price line. As income of a consumer increases, it leads to leftward shift of demand curve from DD to D1. This is because goods in question is an inferior goods.
Figure 2: Increase in the income of consumer shifts demand curve of Goods Y (Inferior Goods) leftwards
Thus, when income of the consumer increases, the demand of goods Y decreases from Q to Q1 keeping price of goods Y fixed.
Normal Goods:
The goods are said to be a normal goods when there is a positive relation between income and demand of a commodity.
Inferior goods:
The goods are said to be inferior goods when there is an inverse relation between income and demand of a commodity.
(c)
To explain:
The impact on demand for goods X due to increase in price of goods Y.
Answer to Problem 1CACQ
The demand for goods X increases when price of goods Y increases.
Explanation of Solution
It is given that the goods X and goods Y are substitute goods which mean that consumer can use these goods in place of one another. Substitute goods are those goods which are used in place of each other. Price of goods X leads to increase in demand for goods Y.
Goods are substitutable in nature. Demand of a goods is affected when price of related goods changes.
The diagram given below shows the effect of increase in the price of goods Y on the demand of goods X.
Figure 3: Demand curve of goods X shifts rightwards as price its substitute goods (Goods Y) increases.
In Figure-3, DD is the original demand curve, P is the price line. As there is an increase in price of goods Y, it leads to shift in demand curve from DD to D 1. Therefore, demand for goods X increases when price of goods Y increases.
Substitute goods:
Substitute goods are those which can be used in place of each other. These goods have a positive cross elasticity.
Complementary goods:
Complementary goods are those which are used together. These goods have negative cross elasticity.
(d)
To explain:
Whether goods Y is a lower quality product than goods X.
Answer to Problem 1CACQ
No, quality of goodsY cannot be determined.
Explanation of Solution
Inferior goods do not mean it is of sub-standard quality. The goods are said to be inferior in nature when the relationship between income of consumer and the demanded quantity of goods is indirect.
As income of consumer rises, it leads to decrease in demand of a commodity, this is because, consumer shifts its demand to a goods which is better than the goods consumed.
As income falls, it leads to increase in consumption of a goods. So, quality of goods Y cannot be determined.
Normal Goods:
The goods are said to be a normal goods when there is a positive relation between income and demand of a commodity.
Inferior goods:
The goods are said to be inferior goods when there is an inverse relation between income and demand of a commodity.
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Chapter 2 Solutions
Managerial Economics & Business Strategy (Mcgraw-hill Series Economics)
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