ISI ME II 2010

[s]

Indicate true or false:

1. if an increase in price of good leads a consumer to buy more of it then an increase in his income will lead him to buy less of the good. by same argument if an increase in price of a good leads him to buy less of it then an increase in his income will lead him to buy more of the good. T or F

what i think is that the 1st case clearly talks about a giffen good..but the 2nd statement is false since a non giffen good for which a price rise leads to quantity fall can be a normal good (income rise,quantity rise) or an inferior good (income rise quantity fall).is that right?

2. a farmer receives all income from sale of his crop at a price beyond his control, consumes more of crop as a result of price rise. the crop is a normal good. T or F

as crop price rises his purchasing power rises so he consumes more of crop..but here income rise leads to quantity rise ( characteristic of a normal good) and price rise ultimately raises consumption( characteristic of a giffen). so what do we treat it as?

[mukund sharma]

the answer for the second one is false as the price is beyond his control and price rise is leading to less consumption to the buyers hence it is an ordinary good

[Amit Goyal]

Shreya, The answer to the first one is correct because law of demand also holds good for the inferior goods.
The answer to the second one is that the crop is the normal good. I recommend you to plot the situation and think about it.

[Dheeraj]

In 7 (a), the first part implies that if a good is giffen good then it is also an inferior good...second part implies that if a good is not a giffen good i.e. increase in price leads to less buying then an increase in his income will lead him to buy more of the good i.e. the good is normal and not inferior.
  The statement is false the good can  be inferior without being giffen.



Now tell me, what's wrong in this..