# Suppose two goods have the following utility function: u(x1, x2)=x10.4, x20.6, what can be said...

## Question:

Suppose two goods have the following utility function: u(x1, x2)=x10.4, x20.6, what can be said about the income elasticity of demand for good x1? What about for good x2?

## Income elasticity of demand:

The income elasticity of demand shows the responsiveness of change in demand due to the change in income of the consumer. In the case of normal goods, the income elasticity is positive and in the case of inferior goods, it is negative.

## Answer and Explanation: 1

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{eq}{\rm{U}}({x_1},{x_2}) = {\rm{x}}_1^{0.4}{\rm{x}}_2^{0.6} {/eq}

The demand function, in case of Cob Douglas utility function,...

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Chapter 6 / Lesson 2Derived demand and inelastic demand are two exceptions to the law of demand that affect business markets. Explore different kinds of demand, look closely at examples of inelastic demand, review derived demand, and discover types of derived demand.

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