WEW-021

Microeconomics Question from Walter E. Williams:

Characterize (graphically) a normal good, an inferior good, and an ultra-superior good. Give examples of each. For two goods X and Y, which of the above must they be if the Income Expansion Path (IEP) has a positive slope? What can you say if the (IEP) has a negative slope?

Answer

Normal Good:A good which remains roughly constant in percentage of income expenditure

• Normal Good: Housing: As income increases housing as a percent of the budget stays roughly the same. Empirical evidence: Accross income brackets people spend roughly 35-45% of their Disposable Income on housing. While it is true that poorer people spend a little more, housing is amazingly stable as income rises.

Inferior Good: A good which decreases as a percent of income as income rises

• Inferior Good: Kraft Dinner "If I had a million dollars... We wouldn't have to eat Kraft Dinner" As income increases inferior food items as a percent of the budget decreases.

Ultra Superior:a good which increases as a percent of income as income rises

* Ultra Superior Good (a.k.a. luxury good): Deep Tissue Massages. As a percent of the budget this will increase faster than income. In my example: At my current level of income I do not buy deep tissue massages although I consider this a good and it would increase my utility. As my income increases there is a certain level where I start consuming positive amounts of deep tissue massage and therefore its share of my income has increased with an increase in income.

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