Deck 3: Income and Substitution Effects

Question 1

If a consumer purchases only two goods (x and y)and the demand for x is elastic,then a rise in the price of x

A)will cause total spending on good y to rise.
B)will cause total spending on good y to fall.
C)will cause total spending on good y to remain unchanged.
D)will have an indeterminate effect on total spending on good y.

Answer 1

A

Question 2

A decrease in demand is represented by

A)a shift outward of the entire demand curve.
B)a shift inward of the entire demand curve.
C)a movement along the demand curve in a southeasterly direction.
D)a movement along the demand curve in a northwesterly direction.

Answer 2

B

Question 3

The price elasticity of demand for a horizontal demand curve is

A)0.
B)1.
C)1.
D) infinity.

Answer 3

D

Question 4

The price elasticity of demand for a vertical demand curve is

A)0.
B)?1.
C)1.
D)? infinity.

Question 5

The price elasticity of demand for a linear demand curve follows the pattern (moving from high prices to low prices)

A)elastic,unit elastic,inelastic.
B)unit elastic,inelastic,elastic.
C)inelastic,unit elastic,elastic.
D)elastic,inelastic,unit elastic.

Question 6

If income doubles and the quantity demanded of good x more than doubles,then good x can be described as a

A)substitute good.
B)complement good.
C)necessity.
D)luxury.

Question 7

Consider the following three concepts: I.Marshallian Demand [x = x(p_x,,p_y ,I)]
II)Indirect Utility [V = g (p_x,,p_y ,I)]
III)Compensated Demand [x = x^c (p_x,,p_y ,U)]
Which of these functions is necessarily homogeneous of degree zero in all its argument?

A)All of them.
B)None of them.
C)Only I.
D)I and III,but not II.

Question 8

The price elasticity of demand for good x is defined as

A)percentage change in p_x / percentage change in x.
B)percentage change in x /percentage change in p_x .
C)percentage change in x/percentage change in income.
D)percentage change in x /percentage change in p_y .

Question 9

Which of the following demand functions is not homogenous of degree zero in p_x ,p_y ,and I?

A)x = I / (p_x,+ p_y ).
B) $x = I ^ { .5 } p _ { x } ^ { - 03 } p _ { y } ^ { - 0.2 }$ .
C) $x = I p _ { y } / p _ { x } ^ { 2 }$ .
D) $x = I p _ { y } / p _ { x }$ .

Question 10

If there are only two goods and these are consumed in fixed proportions,the price elasticities of demand for these two goods will sum to

A)0.0
B)0.5
C)1.0
D)a number between 0 and 1.

Question 11

Which of the following will not cause a demand curve to shift position?

A)A doubling of the good's price.
B)A doubling of the price of a closely substitutable good.
C)A doubling of income.
D)A shift in preferences.
E)A doubling of both the price of X and the price of Y.

Question 12

Consider the two following statements: I.x is an inferior good.
II)x exhibits Giffen's Paradox.
Which of the following is true?

A)I implies II,but II does not necessarily imply I.
B)II implies I,but I does not necessarily imply II.
C)I and II are statements of the same phenomenon.

Question 13

An individual's demand curve

A)represents the various quantities that a consumer is willing to purchase of a good at various price levels.
B)is derived from an individual's indifference curve map.
C)will shift if preferences,prices of other goods,or income change.
D)all of these answers are correct.

Question 14

Demand functions are "homogeneous of degree zero in all prices and income." This means

A)a proportional increase in all prices and income will leave quantities demanded unchanged.
B)a doubling of all prices will not alter consumption decisions.
C)prices directly enter individuals' utility functions.
D)an increase in income will cause all quantities demanded to increase proportionately.

Question 15

If an individual buys only two goods and these must be used in a fixed relationship with one another (e.g.,coffee and cream for a coffee drinker who never varies the amount of cream used in each cup),then

A)there is no substitution effect from a change in the price of coffee.
B)there is no income effect from a change in the price of coffee.
C)Giffen's Paradox must occur if both coffee and cream are inferior goods.
D)an increase in income will not affect cream purchases.

Question 16

If the compensated and Marshallian demand curves for a good intersect,at that point the Marshallian curve will be

A)flatter if this is a normal good.
B)steeper if this is a normal good.
C)flatter if this is an inferior good.
D)horizontal.

Question 17

If the prices of all goods increase by the same proportion as income,the quantity demanded of good x will

A)decrease.
B)increase.
C)remain unchanged.
D)change in a way that cannot be determined from the information given.

Question 18

Assume x and y are the only two goods a person consumes.If after a rise in p_x the quantity demanded of y increases,one could say

A)the income effect dominates the substitution effect.
B)the substitution effect dominates the income effect.
C)it is still impossible to determine whether the substitution or income effect dominates.
D)none of these answers is correct.

Question 19

If the demand for a product is elastic,then a rise in price will

A)cause total spending on the good to increase.
B)cause total spending on the good to decrease.
C)keep total spending the same,but reduce the quantity demanded.
D)keep total spending the same,but increase the quantity demanded