Question 1

If a good is an inferior good, then an increase in its price will increase the demand for it.

Accepted Answer

A) True 
 B)False

Question 2

In the case of homothetic preferences, the entire change in demand from a price change is due to the substitution effect.

Accepted Answer

A) True 
 B)False

Question 3

An increase in the price of a Giffen good makes the people who consume that good better off.

Accepted Answer

A) True 
 B)False

Question 4

When the price of x rises, Marvin responds by changing his demand for x. The substitution effect is the part of this change that represents his change in demand

Accepted Answer

A)  holding the prices of substitutes constant. 
B)  if he is allowed to substitute as much x for y as he wishes. 
C)  if his money income is held constant when the price of x changes. 
D)  if the prices of all other goods are held constant. 
E)  None of the above. 
A)  holding the prices of substitutes constant. 
B)  if he is allowed to substitute as much x for y as he wishes. 
C)  if his money income is held constant when the price of x changes. 
D)  if the prices of all other goods are held constant. 
E)  None of the above.

Question 5

Cindy consumes goods x and y. Her demand for x is given by x(px, m) = 0.05m -5.15px. Now her income is $419, the price of x is $3, and the price of y is $1. If the price of x rises to $4 and if we denote the income effect on her demand for x by DI and the substitution effect on her demand for x by DS, then

Accepted Answer

A)  DI = -0.28 and DS = -0.52. 
B)  DI = -0.28 and DS = -4.88. 
C)  DI = -0.52 and DS = -0.52. 
D)  DI = 0 and DS = -2.00. 
E)  None of the above. 
A)  DI = -0.28 and DS = -0.52. 
B)  DI = -0.28 and DS = -4.88. 
C)  DI = -0.52 and DS = -0.52. 
D)  DI = 0 and DS = -2.00. 
E)  None of the above.

Question 6

The Slutsky substitution effect measures the movement between two points on the same indifference curve.

Accepted Answer

A) True 
 B)False

Question 7

A Giffen good must be an inferior good.

Accepted Answer

A) True 
 B)False

Question 8

Maude thinks delphiniums and hollyhocks are perfect substitutes, one for one. If delphiniums currently cost $5 per unit and hollyhocks cost $6 per unit and if the price of delphiniums rises to $8 per unit,

Accepted Answer

A)  the income effect of the change in demand for delphiniums will be bigger than the substitution effect. 
B)  there will be no change in the demand for hollyhocks. 
C)  the entire change in demand for delphiniums will be due to the substitution effect. 
D)  of the change will be due to the income effect. 
E)  of the change will be due to the income effect 
A)  the income effect of the change in demand for delphiniums will be bigger than the substitution effect. 
B)  there will be no change in the demand for hollyhocks. 
C)  the entire change in demand for delphiniums will be due to the substitution effect. 
D)  of the change will be due to the income effect. 
E)  of the change will be due to the income effect

Question 9

Ivan spends his entire income on two goods. One of them is a Giffen good. If the price of the Giffen good rises, demand for the other good must fall.

Accepted Answer

A) True 
 B)False

Question 10

Neville from your workbook has a friend named Cedric. Cedric has the same demand function for claret as Neville, namely q = .02m - 2p, where m is income and p is price. Cedric's income is $6,000 and he initially had to pay a price of $40 per bottle of claret. The price of claret rose to $60. The substitution effect of the price change

Accepted Answer

A)  reduced his demand by 24. 
B)  reduced his demand by 40. 
C)  reduced his demand by 56. 
D)  increased his demand by 40. 
E)  reduced his demand by 34. 
A)  reduced his demand by 24. 
B)  reduced his demand by 40. 
C)  reduced his demand by 56. 
D)  increased his demand by 40. 
E)  reduced his demand by 34.

Question 11

A consumer has the utility function   . The price of good x is 2 and the price of good y is 1. The consumer's income is 20. If the price of good y rises to 2, then entire change in demand for y is due to the substitution effect.

Accepted Answer

A) True 
 B)False

Question 12

Gladys loves music and spends her money only on tapes and compact discs. She is always willing to trade 2 tapes for 1 compact discs. Originally, music stores sold compact disc for $9 each and tapes for $5 each. Then the price of compact discs fell to $8 each. The change in her consumption of compact discs that resulted was

Accepted Answer

A)  entirely due to the substitution effect. 
B)  entirely due to the income effect. 
C)  partly due to the income effect and partly due to the substitution effect. 
D)  due to the income effect for low incomes and the substitution effect for high incomes. 
E)  There was no change in her demand for compact discs. 
A)  entirely due to the substitution effect. 
B)  entirely due to the income effect. 
C)  partly due to the income effect and partly due to the substitution effect. 
D)  due to the income effect for low incomes and the substitution effect for high incomes. 
E)  There was no change in her demand for compact discs.

Question 13

Suppose that bananas are a normal good and Woody is currently consuming 100 bananas at a price of 10 cents each.

Accepted Answer

A)  His Slutsky compensated demand curve going through this point is steeper than his ordinary demand curve. 
B)  His ordinary demand curve going through this point is steeper than his Slutsky compensated demand curve. 
C)  His ordinary demand curve is steeper to the left and his Slutsky compensated demand curve is steeper to the right of this point. 
D)  Whether his ordinary demand curve or his Slutsky compensated demand curve is steeper depends on whether his price elasticity is greater than 1. 
E)  None of the above. 
A)  His Slutsky compensated demand curve going through this point is steeper than his ordinary demand curve. 
B)  His ordinary demand curve going through this point is steeper than his Slutsky compensated demand curve. 
C)  His ordinary demand curve is steeper to the left and his Slutsky compensated demand curve is steeper to the right of this point. 
D)  Whether his ordinary demand curve or his Slutsky compensated demand curve is steeper depends on whether his price elasticity is greater than 1. 
E)  None of the above.

Question 14

Ben consumes two goods and his utility function is U(x1, x2) = x21x42. The price of good 2 does not change and his income does not change, but the price of good 1 decreases.

Accepted Answer

A)  The income effect is zero, since his income remained constant. 
B)  The substitution effect on the demand for good 2 is zero, since the price of good 2 did not change. 
C)  The substitution effect reduces the demand for good 2, and since the income effect is zero, the demand for good 2 falls. 
D)  The substitution effect of the price change reduces the demand for good 2 and increases the demand for good 1. 
E)  More than one of the above statements is true. 
A)  The income effect is zero, since his income remained constant. 
B)  The substitution effect on the demand for good 2 is zero, since the price of good 2 did not change. 
C)  The substitution effect reduces the demand for good 2, and since the income effect is zero, the demand for good 2 falls. 
D)  The substitution effect of the price change reduces the demand for good 2 and increases the demand for good 1. 
E)  More than one of the above statements is true.

Question 15

Carlos consumes only two goods, apples and bananas. His utility function is given by U(x, y) = min{x, 2y}. He is endowed with wa apples and wb bananas. Unaware that prices are about to change, Carlos buys the quantities of apples and bananas that maximize his utility subject to his budget constraint. After he has made his purchases but before he has eaten them, the relative prices change. Carlos is then free to make further trades at the new relative prices if he wishes.

Accepted Answer

A)  Carlos will definitely be better off after the price change. 
B)  Carlos will definitely be worse off after the price change. 
C)  Carlos will be better off after the price change if the price of the good for which he is a net seller rises relative to the price of the other good. 
D)  Carlos will be better off after the price change if the price of the good for which he is a net buyer rises relative to the price of the other good. 
E)  Carlos's utility will not be affected by the price change. 
A)  Carlos will definitely be better off after the price change. 
B)  Carlos will definitely be worse off after the price change. 
C)  Carlos will be better off after the price change if the price of the good for which he is a net seller rises relative to the price of the other good. 
D)  Carlos will be better off after the price change if the price of the good for which he is a net buyer rises relative to the price of the other good. 
E)  Carlos's utility will not be affected by the price change.

Question 16

If the Engel curve slopes up, then the demand curve slopes down.

Accepted Answer

A) True 
 B)False

Question 17

Polly consumes crackers and fruit. The price of fruit rose and the price of crackers stayed constant. The income effect on Polly's demand is

Accepted Answer

A)  zero because Polly's income didn't change. 
B)  the change in Polly's demand if her income is decreased by the change in the price of fruit times her old consumption of fruit. 
C)  the change in Polly's demand if her income is decreased by the total amount she used to spend on fruit. 
D)  the change in Polly's demand if her income is increased by the amount she used to spend on fruit. 
E)  the change in Polly's demand if her income is increased by the change in the price of fruit times the amount she used to buy. 
A)  zero because Polly's income didn't change. 
B)  the change in Polly's demand if her income is decreased by the change in the price of fruit times her old consumption of fruit. 
C)  the change in Polly's demand if her income is decreased by the total amount she used to spend on fruit. 
D)  the change in Polly's demand if her income is increased by the amount she used to spend on fruit. 
E)  the change in Polly's demand if her income is increased by the change in the price of fruit times the amount she used to buy.

Question 18

Herbie consumes two goods and his utility function is U(x1, x2) = x31x42. The price of good 2 does not change and his income does not change, but the price of good 1 decreases.

Accepted Answer

A)  The substitution effect of the price change reduces the demand for good 2 and increases the demand for good 1. 
B)  The substitution effect reduces the demand for good 2, and since the income effect is zero, the demand for good 2 falls. 
C)  The substitution effect on the demand for good 2 is zero, since the price of good 2 did not change. 
D)  The income effect is zero, since his income remained constant. 
E)  More than one of the above statements is true. 
A)  The substitution effect of the price change reduces the demand for good 2 and increases the demand for good 1. 
B)  The substitution effect reduces the demand for good 2, and since the income effect is zero, the demand for good 2 falls. 
C)  The substitution effect on the demand for good 2 is zero, since the price of good 2 did not change. 
D)  The income effect is zero, since his income remained constant. 
E)  More than one of the above statements is true.

Question 19

Charlie's utility function is xAxB. The price of apples used to be $1, the price of bananas used to be $2, and his income used to be $40. If the price of apples increased to $5 and the price of bananas stayed constant, the substitution effect on Charlie's apple consumption would reduce his consumption by

Accepted Answer

A)  4 apples. 
B)  13 apples. 
C)  8 apples. 
D)  16 apples. 
E)  None of the above. 
A)  4 apples. 
B)  13 apples. 
C)  8 apples. 
D)  16 apples. 
E)  None of the above.

Question 20

If two goods x and y are perfect complements, then if the price of x falls, the entire change in the demand for x is due to the income effect.

Accepted Answer

A) True 
 B)False

Exam 7: Slutsky Equation

If a good is an inferior good, then an increase in its price will increase the demand for it.

In the case of homothetic preferences, the entire change in demand from a price change is due to the substitution effect.

An increase in the price of a Giffen good makes the people who consume that good better off.

When the price of x rises, Marvin responds by changing his demand for x. The substitution effect is the part of this change that represents his change in demand

The Slutsky substitution effect measures the movement between two points on the same indifference curve.

A Giffen good must be an inferior good.

Maude thinks delphiniums and hollyhocks are perfect substitutes, one for one. If delphiniums currently cost $5 per unit and hollyhocks cost $6 per unit and if the price of delphiniums rises to $8 per unit,

Ivan spends his entire income on two goods. One of them is a Giffen good. If the price of the Giffen good rises, demand for the other good must fall.

A consumer has the utility function . The price of good x is 2 and the price of good y is 1. The consumer's income is 20. If the price of good y rises to 2, then entire change in demand for y is due to the substitution effect.

Suppose that bananas are a normal good and Woody is currently consuming 100 bananas at a price of 10 cents each.

Ben consumes two goods and his utility function is U(x1, x2) = x21x42. The price of good 2 does not change and his income does not change, but the price of good 1 decreases.

If the Engel curve slopes up, then the demand curve slopes down.

Polly consumes crackers and fruit. The price of fruit rose and the price of crackers stayed constant. The income effect on Polly's demand is

Herbie consumes two goods and his utility function is U(x1, x2) = x31x42. The price of good 2 does not change and his income does not change, but the price of good 1 decreases.

If two goods x and y are perfect complements, then if the price of x falls, the entire change in the demand for x is due to the income effect.

Budget Constraint

A: Budget Constraint

Preferences

A: Preferences

Utility

A: Utility

Choice

A: Choice

Demand

A: Demand

Revealed Preference

A: Revealed Preference

A: Slutsky Equation

Buying and Selling

A: Buying and Selling

Intertemporal Choice

A: Intertemporal Choice

Asset Markets

A: Asset Markets

Uncertainty

A: Uncertainty

Risky Assets

A: Risky Assets

Consumers Surplus

A: Consumers Surplus

Market Demand

A: Market Demand

Equilibrium

A: Equilibrium

Auctions

A: Auctions

Technology

A: Technology

Profit Maximization

A: Profit Maximization

Cost Minimization

A: Cost Minimization

Cost Curves

A: Cost Curves

Firm Supply

A: Firm Supply

Industry Supply

A: Industry Supply

Monopoly

A: Monopoly

Monopoly Behavior

A: Monopoly Behavior

Factor Markets

A: Factor Markets

Oligopoly

A: Oligopoly

Game Theory

A: Game Theory

Game Applications

A: Game Applications

Behavioral Economics

Exchange

A: Exchange

Production

A: Production

Welfare

A: Welfare

Externalities

A: Externalities

Ben consumes two goods and his utility function is U(x₁, x₂) = x²₁x⁴₂. The price of good 2 does not change and his income does not change, but the price of good 1 decreases.

Herbie consumes two goods and his utility function is U(x₁, x₂) = x³₁x⁴₂. The price of good 2 does not change and his income does not change, but the price of good 1 decreases.