Good A has an income elasticity equal to 1.0 and a cross price elasticity with respect to Good B of -0.6. Then:
A)Good A is an inferior good and Goods A and B are substitutes.
B)Good A is an inferior good and Goods A and B are complements.
C)Good A is a normal good and Goods A and B are substitutes.
D)Good A is a normal good and Goods A and B are complements.

Question

Good A has an income elasticity equal to 1.0 and a cross price elasticity with respect to Good B of -0.6. Then:
A)​Good A is an inferior good and Goods A and B are substitutes.
B)​Good A is an inferior good and Goods A and B are complements.
C)​Good A is a normal good and Goods A and B are substitutes.
D)​Good A is a normal good and Goods A and B are complements.

Quizplus · Accepted Answer

Good A is a normal good because its income elasticity is equal to 1.0, indicating that demand increases proportionally with income. A cross price elasticity of -0.6 with respect to Good B indicates that Goods A and B are complements, as the demand for one increases when the price of the other decreases.

Good a Has an Income Elasticity Equal to 1