Changes in Income
Changes in income shifts the budget constraint and tells us whether a product is normal or inferior.
- Normal Goods - when your income rises you buy more of these products
- Inferior Goods - when your income rises you buy less of these products
- In the diagram above, when the income increases, the optimal bundle (utility maximization) changes from point A to point B.
- This means we are buying ________ units of good X and ________ units of good Y which means they are both ________ goods.
- In the diagram above, as the budget increases, we buy ________ units of X which means X is a ________ good.
- As the budget increases, we buy ________ units of of Y which means Y is an ________ good.
- In the diagram above, as the budget increases, we buy ________ units of X which means X is an ________ good.
- In the diagram above, as the budget increases, we buy ________ units of Y which means Y is a ________ good..
Example: Changes in Income
In the diagram above,
A) Books are inferior and milkshakes are normal
B) Books and milkshakes are normal
C) Books and milkshakes are inferior D) Books are normal and milkshakes are inferior
D
As the budget shifts right we are buying more books so books are normal, but we are buying less milkshakes so milkshakes are inferior.