Question 1

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 2

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 3

Maude thinks delphiniums and hollyhocks are perfect substitutes, one for one.If delphiniums currently cost $2 per unit and hollyhocks cost $3 per unit and if the price of delphiniums rises to $7 per unit,

Accepted Answer

A) there will be no change in the demand for hollyhocks. 
B) the income effect of the change in demand for delphiniums will be bigger than the substitution effect. 
C) 1/5 of the change will be due to the income effect. 
D) the entire change in demand for delphiniums will be due to the substitution effect. 
E) 4/5 of the change will be due to the income effect. 
A) there will be no change in the demand for hollyhocks. 
B) the income effect of the change in demand for delphiniums will be bigger than the substitution effect. 
C) 1/5 of the change will be due to the income effect. 
D) the entire change in demand for delphiniums will be due to the substitution effect. 
E) 4/5 of the change will be due to the income effect.

Question 4

Goods 1 and 2 are perfect complements and a consumer always consumes them in the ratio of 2 units of good 2 to 1 unit of good 1.If a consumer has an income of $300 and if the price of good 2 changes from $5 to $6, while the price of good 1 stays at $1, then the income effect of the price change

Accepted Answer

A) is 6 times as strong as the substitution effect. 
B) does not change the demand for good 1. 
C) accounts for the entire change in demand. 
D) is exactly twice as strong as the substitution effect. 
E) is 5 times as strong as the substitution effect. 
A) is 6 times as strong as the substitution effect. 
B) does not change the demand for good 1. 
C) accounts for the entire change in demand. 
D) is exactly twice as strong as the substitution effect. 
E) is 5 times as strong as the substitution effect.

Question 5

Jimmy's utility function is U(a, b)= ab, where a is his consumption of apples and b is his consumption of bananas.If prices and income change in such a way that Jimmy's old consumption lies on his new budget line, then Jimmy will not change his consumption bundle.

Accepted Answer

A) True 
 B)False

Question 6

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

Question 7

Ernest's income elasticity of demand for natural gas is 0.4.His price elasticity of demand for natural gas is -0.3, and he spends 10% of his income on natural gas.What is his substitution price elasticity?

Accepted Answer

A) -0.26 
B) -.34 
C) .20 
D) -.12 
E) None of the above. 
A) -0.26 
B) -.34 
C) .20 
D) -.12 
E) None of the above.

Question 8

Suggest at least one reason why it might be worth the trouble it takes to learn how to decompose the effects of a price change into an income effect and a substitution effect.

Accepted Answer

The substitution effect of a price incre

Question 9

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 10

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) 1/3 of the change will be due to the income effect. 
E) 2/3 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) 1/3 of the change will be due to the income effect. 
E) 2/3 of the change will be due to the income effect.

Question 11

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.

Exam 7: Slutsky Equation-Part A

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.

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

Maude thinks delphiniums and hollyhocks are perfect substitutes, one for one.If delphiniums currently cost $2 per unit and hollyhocks cost $3 per unit and if the price of delphiniums rises to $7 per unit,

Goods 1 and 2 are perfect complements and a consumer always consumes them in the ratio of 2 units of good 2 to 1 unit of good 1.If a consumer has an income of $300 and if the price of good 2 changes from $5 to $6, while the price of good 1 stays at $1, then the income effect of the price change

Jimmy's utility function is U(a, b)= ab, where a is his consumption of apples and b is his consumption of bananas.If prices and income change in such a way that Jimmy's old consumption lies on his new budget line, then Jimmy will not change his consumption bundle.

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.

Ernest's income elasticity of demand for natural gas is 0.4.His price elasticity of demand for natural gas is -0.3, and he spends 10% of his income on natural gas.What is his substitution price elasticity?

Suggest at least one reason why it might be worth the trouble it takes to learn how to decompose the effects of a price change into an income effect and a substitution effect.

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

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,

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.

Budget Constraint-Part A

Budget Constraint-Part B

Preferences-Part A

Preferences-Part B

Utility-Part A

Utility-Part B

Choice-Part A

Choice-Part B

Demand-Part A

Demand-Part B

Revealed Preference-Part A

Revealed Preference-Part B

Slutsky Equation-Part B

Buying and Selling-Part A

Buying and Selling-Part B

Intertemporal Choice-Part A

Intertemporal Choice-Part B

Asset Markets-Part A

Asset Markets-Part B

Uncertainty-Part A

Uncertainty-Part B

Risky Assets-Part A

Risky Assets-Part B

Consumers Surplus-Part A

Consumers Surplus-Part B

Market Demand-Part A

Market Demand-Part B

Equilibrium-Part A

Equilibrium-Part B

Auctions-Part A

Auctions-Part B

Technology-Part A

Technology-Part B

Profit Maximization-Part A

Profit Maximization-Part B

Cost Minimization-Part A

Cost Minimization-Part B

Cost Curves-Part A

Cost Curves-Part B

Firm Supply-Part A

Firm Supply-Part B

Industry Supply-Part A

Industry Supply-Part B

Monopoly-Part A

Monopoly-Part B

Monopoly Behavior-Part A

Monopoly Behavior-Part B

Factor Markets-Part A

Factor Markets-Part B

Oligopoly-Part A

Oligopoly-Part B

Game Theory-Part A

Game Theory-Part B

Game Applications-Part A

Game Applications-Part B

Behavioral Economics

Exchange-Part A

Exchange-Part B

Production-Part A

Production-Part B

Welfare-Part A

Welfare-Part B

Externalities-Part A

Externalities-Part B

Information Technology-Part A

Information Technology-Part B

Public Goods-Part A

Public Goods-Part B

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.