For m p₂, the demand functions for goods 1 and 2 are given by the equations, x₁ = m/p₂ - 1 and x₂ = p₁/p₂, where m is income and p₁ and p₂ are prices.Let the horizontal axis represent the quantity of good 1.Let p₁ = 1 and p₂ = 2.Then for m 2, the income offer curve is A)a vertical line. B)a horizontal line. C)a straight line with slope 2. D)a straight line with a slope of 1/2. E)None of the above.

Question

For m > p₂, the demand functions for goods 1 and 2 are given by the equations, x₁ = m/p₂ - 1 and x₂ = p₁/p₂, where m is income and p₁ and p₂ are prices.Let the horizontal axis represent the quantity of good 1.Let p₁ = 1 and p₂ = 2.Then for m > 2, the income offer curve is A)a vertical line. B)a horizontal line. C)a straight line with slope 2. D)a straight line with a slope of 1/2. E)None of the above.

Quizplus · Accepted Answer

When m is greater than the product of the two prices, both goods are normal goods and the income offer curve will be a horizontal line. The quantity demanded of good 2 is a function of both prices, so holding one price constant on the horizontal axis will not result in a straight line. Therefore, the answer is B.

For M > P2, the Demand Functions for Goods 1

For M > P₂, the Demand Functions for Goods 1