PAM200_Section5_Solutions

# PAM200_Section5_Solutions - PAM200 Section 5 Problem 5.3 a)...

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Problem 5.3 a) , % / % / Q I Q Q Q Q I I I I I Q ε = = = I and Q must be greater than zero. In addition, assume income increases, i.e., 0 I . If the good is inferior, then 0 Q < . Thus, the first term ( / ) 0 Q I < and the second term ( / ) 0 I Q . Multiplying these two terms together implies , 0 Q I < . Inferior goods have a negative income elasticity of demand. b) If income elasticity of demand is negative then , 0 Q I Q I I Q = < . Since I and Q must be greater than zero, for , Q I to be negative, we must have 0 Q I < . This can only happen if either a) 0 Q < and 0 I or b) 0 Q and 0 I ∆ < . In both instances, the change in quantity demanded moves in the opposite direction as the change in income implying the good is inferior. Problem 5.6

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## This homework help was uploaded on 02/19/2009 for the course PAM 2000 taught by Professor Evans,t. during the Fall '07 term at Cornell.

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PAM200_Section5_Solutions - PAM200 Section 5 Problem 5.3 a)...

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