Question

The -Corporation produces a good (called $\mathbf{X}$) that is a normal good. Its competitor,$\mathbf{Y}$-Corp., makes a substitute good that it markets under the name$\mathbf{Y}$. Good$\mathbf{Y}$is an inferior good.

1. How will the demand for good$\mathbf{X}$change if consumer incomes decrease?
2. How will the demand for good$\mathbf{Y}$change if consumer incomes increase?
3. How will the demand for good$\mathbf{X}$change if the price of good$\mathbf{Y}$increases?
4. Is good$\mathbf{Y}$a lower-quality product than good$\mathbf{X}$? Explain.

Short answer

1. Good X is a normal good, the demand for Good X will decrease as a fall in income shifts the demand curve to the left.
2. Despite the fact that Good Y is an inferior good, the demandfor Good Ywill decrease with the increase in income.
3. When the price of a Good Y increases, demand for Good X will rise.
4. Good Y is not a lower-quality product these products are non-branded products sold in the market, whereas Good X are branded products.

Step-by-step solution

Definition of a normal good and inferior good

A normal good is one that has an increase in demand as a result of rising consumer income. Income and demand for ordinary commodities are positively correlated. Food staples, clothing, and domestic equipment are examples of normal items.

A commodity whose consumption falls as its price falls or as buyers' income rises, allowing them to buy more expensive but preferred commodities is called inferior goods.

Given Information:

Good X and Good Y are substitutes, thus increase in the price of one commodity will decrease demand for that product and increase demand for the substitutes .

Detailed description

a.

When a person's income decreases:The demand for good X will decrease as a change in income will shift the demand curve to the left. Since Good X is a normal good the decrease in demand for the good will be proportionate to the decrease in income.

b.

If the consumer's income rises:

The demand for good Y will decrease as the consumer will have more purchasing power, hence will try to consume expensive commodity bundle and decrease his consumption of inferior goods.

c.

Since, both goods are substitute products, an increase in price of Good Y will decrease its demand followed by an increase in the demand for consumption of good X.

d.

Good Y is not lower quality. The term "lower quality" refers to the functionality of a product. Inferior goods are non-branded similar products. Whereas, Good X is branded but are similar to each other.