Suppose that the income elasticity of demand for good X is positive but less than 1. Other things being equal, which of the following statements is INCORRECT?
A. Good X is a normal good.
B. The quantity demanded of good X decreases as a consumer's income declines.
C. A consumer buys more X as income rises, but the share of income spent on good X falls.
D. A consumer buys more X as income rises and the share of income spent on good X also rises.
Answer: D
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What will be an ideal response?
All used cars are lemons or peaches. Owners know whether or not their car is a lemon, but buyers do not; that is, the quality of a car is private information. There are many more buyers than sellers
Buyers value a peach at $4,000 and a lemon at $200; owners value a peach at $3,000 and a lemon at $100 . Owners can have their cars inspected for $100 . If they do have their car inspected, they will receive a certificate that shows whether the car is a lemon or a peach. Show that owners of peaches will have their cars inspected and will sell those cars for $4,000 . Show also that the owners of lemons will not obtain a certificate and will sell their cars for $200 .
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Substitutes
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