Question

Let x1 represent a typical good (i.e., consumers prefer more of good x1 to less). Let x2 represent a second good in a two-good world. Both goods have continuous indifference curves and income, m, is greater than $0. Under which of the following situations would consumers spend all of their income on just x1?
a. X1 and x2 are perfect complements.
b. The consumer has Cobb-Douglas preferences, and p2 > p1.
c. xi and x2 are perfect substitutes at a 1-to-1 ratio, and p2 > p1.
d. x2 is a bad, meaning less is preferred to more.
e. x2 is a neutral good.

Answer 1

Answer:

d. x2 is a bad, meaning less is preferred to more.

Explanation:

Consumer will spend all of his income on good x1 if good x2 is a bad. When x2 is not preferred by the consumer, he will spend all his income on other available good. The goods available for a consumer might be of different types but the preference is based on the goods.