Deck 4: Demand and Behavior in Markets

Question 1

The impact of an income-induced change in demand caused by a change in price is called the income effect.

Answer 1

True

Question 2

Homothetic preferences imply that consumers will increase the purchases of goods proportionately as their incomes increase and prices stay constant.

Answer 2

True

Question 3

The ratio that tells how much a consumer in a market would have to forgo of one good in order to receive units of another good is called relative prices.

Answer 3

True

Question 4

An inferior good is a good for which demand decreases as the income of the consumer increases and the relative prices remain constant.

Question 5

Markets in which the identity of the traders and their size in the market do not affect the price at which they trade are called

A) monopolistically competitive markets
B) personalized markets
C) impersonal markets

Question 6

Refer to Exhibit 4-3. The budget line rotates from BB' to BB" because the price of good 1

A) increases
B) decreases
C) remains constant

Question 7

The price-consumption path is the curve

A) representing how consumption will vary when one price changes but all other prices and the consumer's income remain constant
B) connecting optimal consumption bundles that shows how a consumer changes the quantity demanded of specified goods as income changes and prices remain constant
C) that represents the relationship between the quantity of good demanded by a consumer and the price of that good as the price varies

Question 8

The primary difference between compensated and uncompensated demand functions is the presence or absence of the income effect that results from price changes.

Question 9

A price-consumption path is drawn by connecting the

A) various veritcal intercepts of the rotated budget lines
B) various horizontal intercepts of the rotated budget lines
C) points of tangencies between indifference curves and rotated budget lines

Question 10

The quantity of a good that people seek to sell at a given price is the quantity demanded.

Question 11

Refer to Exhibit 4-1. A shift from budget line BB' to CC' means that the consumer has

A) equal income
B) more income
C) less income

Question 12

A normal is a good whose demand curve is downward sloping.

Question 13

When the price of a good increases, the substitution effect must lead the agent to consume more.

Question 14

A good for which demand increases as the income of the consumer increases and the relative prices remain constant is called a(n)

A) superior good
B) inferior good
C) normal good

Question 15

The path connecting optimal consumption bundles that shows how a consumer changes the quantity demanded of specified goods as income changes and prices remain constant is called the

A) price-consumption path
B) nonsatiation-convexity path
C) income expansion path

Question 16

A demand curve represents graphically the relationship between the quantity of a good demanded by a consumer and the price of that good as the price varies.

Question 17

Refer to Exhibit 4-2. This income expansion path depicts a(n)

A) superior good
B) normal good
C) inferior good

Question 18

When markets are large and competitive, the consumer merely chooses the bundle of goods that provides the most utility given

A) income and tastes only
B) income, tastes, and the prices prevailing in the market
C) the prices prevailing in the market only

Question 19

Refer to Exhibit 4-3. The budget line rotates from BB" to BB' because the price of good 1

A) increases
B) decreases
C) remains constant

Question 20

A compensated demand function represents the relationship between the price of a good and the quantity demanded, which includes both the substitution and income effects of price changes.

Question 21

A Giffen good is a good whose demand curve

A) is upward sloping
B) is downward sloping
C) jumps from one point on the quantity axis to another, leaving a gap

Question 22

How is the price-consumption path derived?

Question 23

Describe how prices are set in impersonal markets.

Question 24

Will the income effect always cause an increase in the quantity demanded?

Question 25

The substitution effect is the

A) change in demand that results from an attempt to substitute a good whose price has decreased for another good whose price remained constant after having nullified the implicit change in income
B) good for which demand decreases as the income of the consumer increases and the relative prices remain constant
C) impact of an income-induced change in demand caused by a change in price

Question 26

On the horizontal axis of a demand curve graph, the variable measured is the

A) consumer's income
B) quantity demanded of the good
C) price of the good

Question 27

Demand curves are generated by the

A) utility-maximizing behavior of agents
B) income-maximizing behavior of agents
C) nonconvexity behavior of agents

Question 28

Refer to Exhibit 4-4. Which curve represents the compensated demand function?

A) (a)
B) (b)
C) There is not enough information to give an answer.

Question 29

What happens to the substitution and income effects to cause a normal good to have a downward-sloping demand curve?

Question 30

A normal good is a good whose demand curve

A) is upward sloping
B) is downward sloping
C) jumps from one point on the quantity axis to another, leaving a gap

Question 31

Is the typical demand curve used in microeconomics compensated or uncompensated?

Question 32

If a price decrease causes income and substitution effects that work in opposite directions, but the quantity demanded nevertheless increases, the good must be a

A) normal good
B) superior good
C) Giffen good

Question 33

Refer to Exhibit 4-4. Which curve represents the uncompensated demand function?

A) (a)
B) (b)
C) There is not enough information to give an answer.

Question 34

If a demand curve has flat segments, the agent most likely has

A) convex preferences
B) nonconvex preferences
C) nonstrictly convex preferences

Question 35

The income effect is the

A) change in demand that results from an attempt to substitute a good whose price has decreased for another good whose price remained constant after having nullified the implicit change in income
B) good for which demand decreases as the income of the consumer increases and the relative prices remain constant
C) impact of an income-induced change in demand caused by a change in price

Question 36

Every point on a demand curve is also a point on a(n)

A) income expansion path
B) indifference map
C) price-consumption path

Question 37

A demand curve represents graphically the relationship between the quantity of a good demanded by a consumer and the

A) income of the consumer
B) utility of the consumer
C) price of the good as the price varies

Question 38

The substitution effect must always be ___________ in direction to the effect of a price change.

A) identical
B) independent
C) opposite

Question 39

On the vertical axis of a demand curve graph, the variable measured is the

A) consumer's income
B) quantity demanded of the good
C) price of the good

Question 40

If the optimal consumption bundle occurs at the corner of the feasible set, the agent most likely has

A) convex preferences
B) nonconvex preferences
C) nonstrictly convex preferences