2. Identifying normal, inferior, and Giffen goods Aa Aa Suppose thatI1 on the fo

Question

2. Identifying normal, inferior, and Giffen goods Aa Aa Suppose thatI1 on the following graph represents your initial budget constraint for good X and good Y, and point A represents the optimal choice, given this choice set. After a change in the price of good Y, your new budget constraint is now I2. The budget that would allow for the initial level of consumption based on the new prices is parallel to 12, representing the same tradeoff between good X and good Y, and it is tangent to the given indifference curve (U) at point B. GOOD Y 12 Hypothetical Budget GOOD X If point C represents the new optimal choice, what kind of good is good Y? O Normal good O Giffen good Inferior good, but not a Giffen good

Explanation / Answer

Decrease in price of good Y pivot the curve outwards. Consumption of good Y is not increased even price of good Y decreases.

It imply that Good Y is giffen good.

Normal and inferior goods are those goods who have relation with change in income of the consumer rather than the price of good.

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