<p>Check out <a href="http://njsanders.people.wm.edu/100A/Deriving_Demand_Functions_Examples.pdf" rel="nofollow">the demand functions</a> for three cases:</p>

<ol>
<li>CES Utility</li>
<li>Leontief Utility</li>
<li>Cobb-Douglas Utility</li>
</ol>

<p>You should be able to see that the first case gives you that demand for good 1 increases, the second case demand for good 1 decreases, and in case 3 it is unchanged. </p>

CC BY-SA 3.0
2016-10-26T13:09:37.963Z
2016-10-26T13:09:37.963Z
BKay
<p>If consumers make choices on a constrained budget, the marginal net utility derived from the consumption of the good 1 would be relatively higher than the good 2 after its price hike.</p>

<p>Thus, an indirect effect of the increase of the price of the good 2 would be an increase of the demand for good 1 as consummer preferences realign toward it.</p>

CC BY-SA 3.0
2016-10-26T06:52:34.203Z
What if the goods are perfect complements that must be consumed in the ratio 1:1? Your reasoning would then imply that consumption of both 1 and 2 would increase, which is impossible if income is fixed and the budget constraint binds.
Ubiquitous
CC BY-SA 3.0
2016-10-26T12:25:36.640Z
Perhaps this isn't a point worth making, but are we assuming there is no saving/inter-temporal trading within this model (it is after all, explicitly a micro question)?
bappers2
CC BY-SA 3.0
2016-10-26T14:50:44.270Z
@Ubiquitous: it is specified in the question that good 1 is a normal good, not a complement. If it was the case, the consumption of both goods would decrease as the price of good 2 goes up.
CodingDahu
CC BY-SA 3.0
2016-10-26T17:07:05.437Z
@CodingDahu a good can be both normal and a complement. Normal just means that demand is increasing in income.
Ubiquitous
CC BY-SA 3.0
2016-10-25T22:17:03.790Z
2016-10-26T11:51:37.983Z
2016-10-26T11:51:37.983Z
CodingDahu
<p>Suppose we have a two-good economy, and we know that good 1 is a normal good. Can we then make any meaningful observation about the demand for good 1 when we change the price of good 2 and keep the price of good 1 constant? </p>

CC BY-SA 3.0
2016-10-25T18:02:37.677Z
This seems like a homework question. Please share your thoughts.
Giskard
<microeconomics><price>
Two-good economy, can we tell if the demand of good 1 rises or falls when the price of good 2 rises (price of 1 is constant)?
Janey
# Two-good economy, can we tell if the demand of good 1 rises or falls when the price of good 2 rises (price of 1 is constant)?

(Asked by: username_0 on 2016-10-25)

Suppose we have a two-good economy, and we know that good 1 is a normal good. Can we then make any meaningful observation about the demand for good 1 when we change the price of good 2 and keep the price of good 1 constant?

**Tags:** microeconomics, price
> **Comments:**
> **username_1**: This seems like a homework question. Please share your thoughts.  

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## 2 answers

### Answer by username_2 on 2016-10-26. Score: 1

Check out [the demand functions](http://njsanders.people.wm.edu/100A/Deriving_Demand_Functions_Examples.pdf) for three cases:

1. CES Utility
2. Leontief Utility
3. Cobb-Douglas Utility

You should be able to see that the first case gives you that demand for good 1 increases, the second case demand for good 1 decreases, and in case 3 it is unchanged.


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### Answer by username_3 on 2016-10-25. Score: 0

If consumers make choices on a constrained budget, the marginal net utility derived from the consumption of the good 1 would be relatively higher than the good 2 after its price hike.

Thus, an indirect effect of the increase of the price of the good 2 would be an increase of the demand for good 1 as consummer preferences realign toward it.

> **Comments:**
> **username_4**: What if the goods are perfect complements that must be consumed in the ratio 1:1? Your reasoning would then imply that consumption of both 1 and 2 would increase, which is impossible if income is fixed and the budget constraint binds.  
> **username_5**: Perhaps this isn't a point worth making, but are we assuming there is no saving/inter-temporal trading within this model (it is after all, explicitly a micro question)?  
> **username_3**: @Ubiquitous: it is specified in the question that good 1 is a normal good, not a complement. If it was the case, the consumption of both goods would decrease as the price of good 2 goes up.  
> **username_4**: @CodingDahu a good can be both normal and a complement. Normal just means that demand is increasing in income.  

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