(a) A good is a luxury if it has a budget elasticity larger than 1, (i.e., good k is a luxury if εk ≡ ∂qk/∂m *m/qk> 1). Show that when a good is a luxury, then if a consumer’s total budget rises, they will raise the share of their budget they allocate to the good. (b) Suppose m is the total budget a consumer has available to spend on three electronic products, a laptop, a phone and a tablet. Can all three of these goods simultaneously be luxuries? Why or why not?
(a) A good is a luxury if it has a budget elasticity larger than 1, (i.e., good k is a luxury if εk ≡ ∂qk/∂m *m/qk> 1). Show that when a good is a luxury, then if a consumer’s total budget rises, they will raise the share of their budget they allocate to the good. (b) Suppose m is the total budget a consumer has available to spend on three electronic products, a laptop, a phone and a tablet. Can all three of these goods simultaneously be luxuries? Why or why not?
Chapter7: Consumer Choice: Maximizing Utility And Behavioral Economics
Section: Chapter Questions
Problem 6QP
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- (a) A good is a luxury if it has a budget elasticity larger than 1, (i.e., good k is a luxury if εk ≡
∂qk/∂m *m/qk> 1). Show that when a good is a luxury, then if a consumer’s total budget rises, they
will raise the share of their budget they allocate to the good.
(b) Suppose m is the total budget a consumer has available to spend on three electronic products,
a laptop, a phone and a tablet. Can all three of these goods simultaneously be luxuries? Why
or why not?
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