Let, eXY = 4 and eAB = 0.8 . Describe the nature of goods X and Y and goods A and B. GROUP: B Descriptive Answer Questions 5 × 10 = 50

The nature of goods can be determined by the value of their price elasticity of demand (e).

• Goods X and Y: Given $e_{XY}=4$, the price elasticity of demand for goods X and Y is greater than 1. This indicates that these goods are elastic. Specifically, since the elasticity is positive, they are normal goods with a highly elastic demand. This means that a small change in price leads to a proportionally larger change in quantity demanded.

• Goods A and B: Given $e_{AB}=-0.8$, the price elasticity of demand for goods A and B is less than 1 in absolute value. This indicates that these goods are inelastic. Since the elasticity is negative, they are normal goods with inelastic demand. Additionally, the negative sign suggests that these goods are complements (if the context implies a relationship between A and B), but more likely, it simply reflects the law of demand (price and quantity demanded move in opposite directions). Thus, a change in price leads to a smaller proportional change in quantity demanded.