Deck 4: Demand Relationships Among Goods

Question 1

The primary additional insight provided by expanding the theory of demand from two to three goods is that a pair of goods may now be:

A)gross substitutes.
B)gross complements.
C)net substitutes.
D)net complements.

Answer 1

net complements.

Question 2

Use the following definitions for an individual who consumes only two goods,x and y:
s_x = share of income spent on x.
s_y = 1-s_x.​ = price elasticity of demand for x.​ = price elasticity of demand for y.
​e_x,I = income elasticity of demand for x.
​
e_y,I = income elasticity of demand for y.​ = cross price elasticity of demand for x.​ = cross price elasticity of demand for y.
A generalization of Engel's Law is given by:

A)
B)
C)
D)

Answer 2

Question 3

Use the following definitions for an individual who consumes only two goods,x and y:
s_x = share of income spent on x.
s_y = 1-s_x.​ = price elasticity of demand for x.​ = price elasticity of demand for y.
​e_x,I = income elasticity of demand for x.
​
e_y,I = income elasticity of demand for y.​ = cross price elasticity of demand for x.​ = cross price elasticity of demand for y.
Homogeneity of the demand function is shown by:

A)
B)
C)
D)

Answer 3

Question 4

If utility is separable in a three-good utility function x₃


Then for changes in
Must:

A)both be gross substitutes for x₁.
B)both be gross complements for x₁.
C)be such that if one is a gross substitute for x₁,the other is a gross complement for x₁.
D)both be gross substitutes or both be gross complements for x₁.

Question 5

"Hicks' Third Law of Demand" states that "most" goods must be:

A)gross substitutes.
B)gross complements.
C)net substitutes.
D)net complements.

Question 6

Use the following definitions for an individual who consumes only two goods,x and y:
s_x = share of income spent on x.
s_y = 1-s_x.​ = price elasticity of demand for x.​ = price elasticity of demand for y.
​e_x,I = income elasticity of demand for x.
​
e_y,I = income elasticity of demand for y.​ = cross price elasticity of demand for x.​ = cross price elasticity of demand for y.
If the demand for x is given by ,which of parameter values hold?

A)
B)
C)
D)None of these relations hold since the demand function is not homogeneous of degree zero in

Question 7

Quasi-concavity of utility functions insures that with only two goods,these goods must be:

A)gross substitutes.
B)gross complements.
C)net substitutes.
D)net complements.

Question 8

Two goods are Hicks (net)substitutes if a rise in the price of one causes a(n):

A)decline in the quantity demanded of the other holding nominal income constant.
B)increase in the quantity demanded of the other holding nominal income constant.
C)decline in the quantity demanded of the other holding utility constant.
D)increase in the quantity demanded of the other holding utility constant.

Question 9

With the Cobb-Douglas utility function
,x and y are:

A)net and gross substitutes.
B)net substitutes and gross complements.
C)net substitutes and neither gross substitutes or complements.
D)net and gross complements.

Question 10

Symmetry of net substitution effects is one of the principal conclusions of the theory of utility maximization.Which two mathematical theorems are used to prove this symmetry?

A)Taylor's Theorem and Fundamental Theorem of Calculus
B)Cauchy's Theorem and DeMoivre's Theorem
C)Lagrangian Theorem and Fundamental Theorem of Calculus
D)Envelope Theorem and Young's Theorem

Question 11

For the "Composite Commodity Theorem" to hold,all goods in the composite must:

A)have constant prices.
B)have constant relative prices.
C)be used in fixed proportions.
D)be net complements.

Question 12

For the Cobb-Douglas utility function with two goods,the sum of the own price elasticities of demand must be:

A)0.
B)-1.
C)-2.
D)any number between 0 and -4.

Question 13

In the Slutsky equation for ,the income effect is given by:

A)
B)
C)
D)

Question 14

Use the following definitions for an individual who consumes only two goods,x and y:
s_x = share of income spent on x.
s_y = 1-s_x.​ = price elasticity of demand for x.​ = price elasticity of demand for y.
​e_x,I = income elasticity of demand for x.
​
e_y,I = income elasticity of demand for y.​ = cross price elasticity of demand for x.​ = cross price elasticity of demand for y.
The elasticity of the compensated demand curve
Can be computed as:

A)
B)
C)
D)

Question 15

If goods x and y are complements,then the cross price elasticity of demand between them will be:

A)positive.
B)negative.
C)zero.
D)infinity.

Question 16

With only two goods,x and y,if x and y are gross substitutes,a rise in p_x must necessarily:

A)increase spending in x.
B)reduce spending in x.
C)increase spending in y.
D)reduce spending in y.

Question 17

The attributes model of consumer choice explains the possibility that an individual does not purchase a particular good,z by assuming:

A)the person's preferences do not favor z.
B)linear combinations of other goods dominate z.
C)that
Is less than the marginal utility of income.
D)z is inferior.

Question 18

If a rise in the price x causes less y to be demanded:

A)x and y are gross complements.
B)x and y are gross substitutes.
C)x and y are net complements.
D)x and y are net substitutes.