Author Question: What does the sign (positive/negative) of the income elasticity tell us about a good? What will ... (Read 37 times)

ssal · **on:** Jun 29, 2018

What does the sign (positive/negative) of the income elasticity tell us about a good?

What will be an ideal response?

Question 2

How does a consumer's budget set differ from his budget constraint? For a consumer with a given level of income, will the budget set have more combinations of goods or will the number of combinations be higher for the budget constraint?

What will be an ideal response?

nguyenhoanhat · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

The sign of the income elasticity of demand reveals whether a good is a normal good or an inferior good: The income elasticity of demand is positive for normal goods and negative for inferior goods.

Answer to Question 2

The budget set is the set of all possible bundles of goods and services that a consumer can purchase with his income, irrespective of whether the entire income is used. The budget constraint represents only those bundles that exhaust the consumer's income. Therefore, the budget set has more consumption bundles than the budget constraint.