Chapter 2 Tutorial 3

1. In a world of 2 goods (x & y), if they are gross substitutes and x is a normal good, the price elasticity of demand for x will necessarily be greater than unity. True or False? Explain.

There are many questions similar to this one. The good thing about this question is that it puts into play the 3 concepts that examiners love to test us on. They are highlighted in BLUE.

I am sure that you are well-versed in tackling the first 2 concepts. The tough part should be proving the price elasticity of demand for good x. Think about the budget equation: I0=Px0.X0 + Py0.Yo

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4 Comments

  1. Ashton says:

    Can you explain in layman what does this phrase mean in layman term?

    (demand elasticity of good x is greater than utility)

  2. Yuriy says:

    Great stuff. Thanks for the explanation of the second part of the question regarding elasticity!