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    Question

    Suppose A consumes only 2 goods X &Y such that A exhausts all the income. Ceteris Paribus, if the price of X rises and the price elasticity of X is 1.2 then what is the impact on the consumption of good Y

    A Increases Correct Answer Incorrect Answer
    B Decreases Correct Answer Incorrect Answer
    C Remains same Correct Answer Incorrect Answer
    D Can increase or decrease Correct Answer Incorrect Answer

    Solution

    Solution When the price of X rises, quantity demanded for X will fall and because the price elasticity of demand is 1.2; the total expenditure made on the good will fall. So, the consumer will be left with more money income to spend on Y. Thus, quantity demanded of Y increases.

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