Good A has an income elasticity equal to -1.0 and a cross price elasticity with respect to Good B of 0.9. 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 0.9. 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 an inferior good because its income elasticity is negative (-1.0). Goods A and B are substitutes because the cross price elasticity is positive (0.9).

Good a Has an Income Elasticity Equal to -1