Q1. Assume that the demand for a product X is heavily influenced by the price of another product Y (Py), and the income of consumers (I). The cross-price elasticity of X with respect to Y is exy = 1.25, and the income elasticity is eI = 2.

A. Are X and Y complements or substitutes? Why?

B. Is X a normal or inferior good?

C. Suppose now Py decreases by 5%, and consumer income decreases by 1%. Will the quantity demanded of X increase or decrease? By what percent?