Ecomomics- Elasticity Helpq

Could someone help me with these sums please?

1. A consumer purchases two products X and Y. When the price of X falls, he is observed to increase his purchases of both products. which of the following statements is correct?

a) There is no substitution effect in this case
b) The substitution effect is outweighed by the income effect
c) There is a substitution effect but no income effect.
d) The consumer's demand curves for X and Y have shifted in position.

2. An increase in the price of A is the direct cause of a decrease in demand for B. A possible explanation is that (more than one option can be picked for this question)

a) A and B are substitutes but the income effect is more powerful than the substitution effect
b) A and B are complementary producs
c) B is an inferior good

3. An increase in the price of product X together with a decrease in the quantity of X demanded could be the result of (more than one option can be picked for this question)

a) an increase in the wages of workers making X
b) an increase in consumer incomes
c) A decrease in the price of a substitute product

Thanks so much. I'm having much trouble with these questions. I will give rep to anyone who is kind enough to answer them nicely.

Reply 1

RJA

2

These are the answers that stand out to me...

1. A consumer purchases two products X and Y. When the price of X falls, he is observed to increase his purchases of both products. which of the following statements is correct?

a) There is no substitution effect in this case
b) The substitution effect is outweighed by the income effect
c) There is a substitution effect but no income effect.
d) The consumer's demand curves for X and Y have shifted in position.

2. An increase in the price of A is the direct cause of a decrease in demand for B. A possible explanation is that (more than one option can be picked for this question)

a) A and B are substitutes but the income effect is more powerful than the substitution effect
b) A and B are complementary producs
c) B is an inferior good

3. An increase in the price of product X together with a decrease in the quantity of X demanded could be the result of (more than one option can be picked for this question)

a) an increase in the wages of workers making X
b) an increase in consumer incomes
c) A decrease in the price of a substitute product

Reply 2

trinklets

OP

RJA

These are the answers that stand out to me...

1. A consumer purchases two products X and Y. When the price of X falls, he is observed to increase his purchases of both products. which of the following statements is correct?

a) There is no substitution effect in this case
b) The substitution effect is outweighed by the income effect
c) There is a substitution effect but no income effect.
d) The consumer's demand curves for X and Y have shifted in position.

Wouldn't the price of X falling and the rise in prices of both products mean that the two products are complementary goods?

Also, i'm terribly sorry but for number 2 and 3, i forgot to mention that more than one can be picked. for 2 specifically, would you pick any other option?

Edit: oh wait, i did mention it. but anyway do you think anything else can apply?

Reply 3

2nd2god

11

No question 1 is definatley B
I think the question assumes that they are subsitututes,
Yeah they could be complimentary but I think its unlikley I think its like a p.p.f where he can either buy one or the other.
as the price of x decreases obviously some demand will switch from y, but for the demand of both to rise this would have to be outwieghed by the increase in demand for both goods because of a rise in income, so 1 is b.
And in my opinion 1 would also be d, because the increase in income has shifted the consumers demand outwards. So 1 is b and d.
But if you are only allowed to pick one in this question I would go for b.

2. is B thats basically the definition of a complementrary good. The other two don't work for a start it can't be a because its a direct effect, the the income effect is an indirect effect.

3. is hinting at an increase in the cost of production
which would be a
Again b and c don't make sense, as quantity demanded should rise.

Hope this helps.

Reply 4

RJA

2

2 could also be A

3 could also be C

Reply 5

trinklets

OP

2nd2god

but I think its unlikley I think its like a p.p.f where he can either buy one or the other.
.

Hi, I hope you don't see this as pointless arguing on my part because I'm genuinely curious. The question did say that the guy bought both products. And since he bought both products and he realized when the price of one of them went up, he bought less of both, isn't it indicative that they are complementary goods?

Thanks for all your help so far! and RJA too :biggrin:

Reply 6

2nd2god

11

Maybe I'm getting confused but the question said he brought more of both?

Reply 7

trinklets

OP

Sorry, i got it the other way around. Instead of price went up and bought less of both like I accidentally said, i meant the price went down and he bought more of both. Which still indicates a complementary relationship right?

Terribly sorry about that.

Ecomomics- Elasticity Helpq

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