Question 1

A Giffen good must be an inferior good.

Accepted Answer

A) True 
 B)False  True

Question 2

In 2000,Bruce spent his income on two goods,x and y.Between 2000 and 2001,the price of good x rose by 8% and the price of good y rose by 8%.In 2001,Bruce bought the same amount of x as he bought in 2000,but he bought more of good y than he had bought in 2000.

Accepted Answer

A)  y is a normal good. 
B)  y is an inferior good. 
C)  x is an inferior good. 
D)  Nothing can be said about inferiority or superiority,since we don't know what happened to income. 
E)  Bruce is acting irrationally,since the relative prices of x and y did not change. 
A)  y is a normal good. 
B)  y is an inferior good. 
C)  x is an inferior good. 
D)  Nothing can be said about inferiority or superiority,since we don't know what happened to income. 
E)  Bruce is acting irrationally,since the relative prices of x and y did not change. A

Question 3

A rational consumer prefers more of good x to less.If the price of good x rises and the prices of all other goods remain constant,then the consumer must necessarily demand less of x.

Accepted Answer

A) True 
 B)False  False

Question 4

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 5

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 6

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 7

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 8

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 9

Neville from your workbook has a friend named Peregrine.Peregrine has the same demand function for claret as Neville,namely q = .02m - 2p,where m is income and p is price.Peregrine's income is $6,500 and he initially had to pay a price of $50 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 20. 
B)  increased his demand by 20. 
C)  reduced his demand by 14. 
D)  reduced his demand by 26. 
E)  reduced his demand by 24. 
A)  reduced his demand by 20. 
B)  increased his demand by 20. 
C)  reduced his demand by 14. 
D)  reduced his demand by 26. 
E)  reduced his demand by 24.

Question 10

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 11

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 12

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 13

Jessica's preferences for peanut butter and jelly are represented by the utility function U(p,j)= min{2p,5j}.If prices and income change,but her old consumption bundle lies somewhere on her new budget line,she will not change her consumption.

Accepted Answer

A) True 
 B)False

Question 14

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 15

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 $120 and if the price of good 2 changes from $3 to $4,while the price of good 1 stays at $1,then the income effect of the price change

Accepted Answer

A)  is 4 times as strong as the substitution effect. 
B)  does not change the demand for good 1. 
C)  is exactly twice as strong as the substitution effect. 
D)  accounts for the entire change in demand. 
E)  is 3 times as strong as the substitution effect. 
A)  is 4 times as strong as the substitution effect. 
B)  does not change the demand for good 1. 
C)  is exactly twice as strong as the substitution effect. 
D)  accounts for the entire change in demand. 
E)  is 3 times as strong as the substitution effect.

Question 16

Charlie's utility function is xAxB.The price of apples used to be $1 per unit and the price of bananas was $2 per unit.His income was $40 per day.If the price of apples increased to $1.50 and the price of bananas fell to $1.75,then in order to be able to just afford his old bundle,Charlie would have to have a daily income of

Accepted Answer

A)  $23.75. 
B)  $47.50. 
C)  $96. 
D)  $71.25. 
E)  $190. 
A)  $23.75. 
B)  $47.50. 
C)  $96. 
D)  $71.25. 
E)  $190.

Question 17

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 18

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 19

A taxpayer says,"Sure I pay a lot of income tax,but I don't mind because I get back just as much money as I pay in." Assuming that his facts are correct,explain why the taxpayer's reasoning is faulty.Use a diagram to show that an income tax can make a person worse off even if he is rebated an amount of money equal to what he paid in.

Accepted Answer

Since an income tax lowers the

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 8:Slutsky Equation-Part A

A Giffen good must be an inferior good.

In 2000,Bruce spent his income on two goods,x and y.Between 2000 and 2001,the price of good x rose by 8% and the price of good y rose by 8%.In 2001,Bruce bought the same amount of x as he bought in 2000,but he bought more of good y than he had bought in 2000.

A rational consumer prefers more of good x to less.If the price of good x rises and the prices of all other goods remain constant,then the consumer must necessarily demand less of x.

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.

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.

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.

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

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.

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

Jessica's preferences for peanut butter and jelly are represented by the utility function U(p,j)= min{2p,5j}.If prices and income change,but her old consumption bundle lies somewhere on her new budget line,she will not change her consumption.

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.

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 $120 and if the price of good 2 changes from $3 to $4,while the price of good 1 stays at $1,then the income effect of the price change

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

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.

Demand-Part A

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-Part A

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

Asymmetric Information-Part A

Asymmetric Information-Part B

Filters

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.