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CSEET · Economic and Business Environment · Basics of Demand and Supply and Forms of Market Competition

Household income in a city rises, and the demand for packaged ready-to-eat meals rises at every price, whereas the demand for loose low-quality grain falls at every price. Which classification of the two goods is correct?

Packaged meals are normal goods and low-quality grain is an inferior good. Demand for a normal good rises when income rises, while demand for an inferior good falls as income rises because consumers switch to better alternatives. Nothing here describes a Giffen good.

  1. APackaged meals are normal goods and low-quality grain is an inferior goodCorrect
  2. BPackaged meals are inferior goods and low-quality grain is a normal good
  3. CBoth are normal goods
  4. DBoth are Giffen goods

Explanation

A normal good has demand that rises with income, as with the packaged meals. An inferior good has demand that falls as income rises, as with the low-quality grain. Giffen goods are a special inferior case involving a rising demand curve when own price rises, which is not described here.

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