- CFA Exams
- CFA Level I Exam
- Topic 2. Economics
- Learning Module 8. Topics in Demand and Supply Analysis
- Subject 3. Substitution Effect, Income Effect, Normal and Inferior Goods
CFA Practice Question
When John was in college and his income was low, he drank "Red Ribbon" beer. As his income increased, he purchased better-quality beer and less "Red Ribbon." Which graph in the following figure best represents John's Engel curve for "Red Ribbon" beer?
B. B
C. C
D. D
A. A
B. B
C. C
D. D
Correct Answer: D
User Contributed Comments 5
| User | Comment |
|---|---|
| tangyjab | Why isn't the answer A? |
| tkemp2 | This one seems like the previous example, however, at no point in time is "Red Ribbon" considered a normal good. The only reason John was purchasing it at lower income levels is because that is what he could afford. Graph D has him purchasing more of it at a lower income level and less of it at a higher income level. The previous example stated that the good could act as a normal good at some income levels and an inferior good at others...that's not the case for Red Ribbon here. The problem basically states that the higher his income, the less of it he is going to buy...hope that made sense |
| kseeba17 | Why isn't Angel curve mentioned previously? Why are we paying AN if I constantly have to resort to google to explain stuff... |
| myron | The Engel curve is almost a must-know concept in economics. |
| IatLs | Thank you tkemp2. Your explanation is very helpful. |