By observing an individual’s behavior in the situations outlined below, determine the relevant income elasticities of demand for each good (i.e., whether it is normal or inferior). If you cannot determine the income elasticity, what additional information do you need?
a) Bill spends all his income on books and coffee. He finds $20 while rummaging through a used paperback bin at the bookstore. He immediately buys a new hardcover book of poetry.
b) Bill loses $10 he was going to use to buy a double espresso. He decides to sell his new book at a discount to a friend and use the money to buy coffee.
c) Being bohemian becomes the latest teen fad. As a result, coffee and book prices rise by
25%. Bill lowers his consumption of both goods by the same percentage.
d) Bill drops out of art school and gets an M.B.A. instead. He stops reading books and drinking coffee. Now he reads The Wall Street Journal and drinks bottled mineral water.