Question 1

Figure 4.2.1
-Refer to Figure 4.2.1 above. Starting at point A, which of the following moves represents the total effect of a price change?

Accepted Answer

The move from F₁ to F₂ represents the change in quantity demanded due to the price change. This move represents the movement along the demand curve.

Question 2

Melissa's optimal consumption is indicated in the diagram below for three different income levels. For Melissa are park visits a normal or inferior good? Explain your answer.

Accepted Answer

The answer of Melissa's optimal consumption is indicated in the...

Question 3

Which of the following is true concerning the substitution effect of a decrease in price?

Accepted Answer

The substitution effect of a decrease in price always leads to an increase in consumption, regardless of whether the good is normal, inferior or Giffen. The substitution effect is the result of consumers switching to the cheaper good when its price decreases, all else being equal. This leads to an increase in quantity demanded of the cheaper good and a decrease in quantity demanded of the more expensive alternative.

Question 4

Figure 4.2.2
-Refer to Figure 4.2.2 above. Starting at point A, which of the following represents the substitution effect of an increase in the price of food?

Accepted Answer

The substitution effect of an increase in the price of food is represented by the move from point A to point B. This illustrates how the consumer adjusts their consumption in favor of the good that has become relatively cheaper, holding utility constant.

Question 5

A change in consumption of a good resulting from an increase in purchasing power, with relative prices held constant, is referred to as:

Accepted Answer

The increase in purchasing power results in the consumer being able to afford more of the same good, leading to a change in the quantity demanded. This response is known as the income effect. The substitution effect, on the other hand, occurs when consumers switch to a cheaper good when the price of a good goes up, holding real income constant. The wealth effect refers to the change in consumption due to a change in overall wealth, not just purchasing power. The total effect of a price change is a combination of both the income and substitution effects.

Question 6

The response to a change in the relative prices of goods is called:

Accepted Answer

The response to a change in relative prices of goods is called the substitution effect, which refers to consumers substituting the relatively cheaper good for the relatively more expensive one. The income effect refers to the change in purchasing power due to a change in income, the wealth effect refers to the change in consumption as a result of changes in wealth, and the price effect is a broader term that may refer to both the substitution and income effects.

Question 7

Figure 4.2.1
-Refer to Figure 4.2.1 above. Which of the following moves represents the substitution effect?

Accepted Answer

The substitution effect is the change in consumption resulting from a change in the relative prices of goods, holding utility constant. The move from F1 to E represents this effect.

Question 8

Figure 4.2.2
-Refer to Figure 4.2.2 above. The effect of a decrease in the price of food, as depicted in the figure, leads us to believe that:

Accepted Answer

The answer of  Figure 4.2.2
-Refer to Figure 4.2.2 above....

Question 9

For an inferior good, the income and substitution effects

Accepted Answer

For an inferior good, the income effect and the substitution effect work against each other. The income effect suggests that as income decreases, the demand for the inferior good increases due to its lower price compared to other goods. However, the substitution effect suggests that as the price of the inferior good decreases, consumers switch to substitute goods, reducing the demand for the inferior good. Therefore, the income and substitution effects work in opposite directions, resulting in a mixed or ambiguous effect on the demand for inferior goods.

Question 10

A Giffen good

Accepted Answer

A Giffen good is a special subset of inferior goods in which the income effect dominates the substitution effect. This means that as the price of the good increases, consumers have less purchasing power, which causes them to buy even more of the inferior good due to the lack of affordable substitutes. A Giffen good results in an upward sloping demand curve, which is contrary to the typical downward sloping demand curve for most goods. Therefore, options A, B, and D are incorrect.

Question 11

The change in demand resulting from this change in real purchasing power is called:

Accepted Answer

The change in demand resulting from a change in real purchasing power (i.e. income) is called the income effect. This occurs because as the consumer's income changes, their ability to purchase goods and services also changes, leading to a shift in their demand for certain goods and services. The substitution effect and price effect refer to changes in demand due to changes in relative prices, while the wealth effect refers to a change in demand resulting from a change in the value of a consumer's assets.

Question 12

Figure 4.2.2
-Refer to Figure 4.2.2 above. Starting from point A, after the price of food decreases,, the quantity of food purchased:

Accepted Answer

When the price of food decreases, the substitution effect leads to an increase in the quantity of food purchased as consumers substitute cheaper food for other goods. However, the income effect might lead to a decrease if food is an inferior good, but typically, the substitution effect dominates, leading to an overall increase.

Question 13

Using the table below, construct an Engel Curve for each beer type.

Accepted Answer

The answer of Using the table below, construct an Engel...

Question 14

After a good falls in price, consumers will tend to buy more of the good that has become cheaper and less of those goods that are now relatively more expensive. This fact is called:

Accepted Answer

The fact described is the substitution effect, where consumers substitute the now cheaper good for other goods that are now relatively more expensive. The income effect refers to the change in purchasing power due to changes in income, the wealth effect refers to changes in consumer spending due to changes in wealth or assets, and the price effect is not a commonly used term in economics.

Question 15

Assume that beer is a normal good. If the price of beer rises, then the substitution effect results in the person buying ________ of the good and the income effect results in the person buying ________ of the good.

Accepted Answer

The substitution effect means that as the price of beer rises, it becomes more expensive relative to other goods, so the person will buy less of it. The income effect means that the price increase effectively reduces the person's purchasing power, making them feel poorer, so they also buy less of the normal good.

Question 16

After a good falls in price, consumers are better off because they can buy the same amount of the good for less money, and thus have money left over for additional purchases. This fact is called:

Accepted Answer

The income effect describes how a change in the price of a good affects consumer purchasing power, allowing them to feel effectively wealthier and able to purchase more when prices decrease.

Question 17

Figure 4.2.3
-Refer to Figure 4.2.3 above. The effect of a decrease in the price of food, as depicted in the figure, leads us to believe that:

Accepted Answer

The answer of  Figure 4.2.3
-Refer to Figure 4.2.3 above....

Question 18

Figure 4.2.1
-Refer to Figure 4.2.1 above. Which of the following moves represents the income effect?

Accepted Answer

The answer of  Figure 4.2.1
-Refer to Figure 4.2.1 above....

Question 19

Assume that beer is an inferior good. If the price of beer falls, then the substitution effect results in the person buying ________ of the good and the income effect results in the person buying ________ of the good.

Accepted Answer

When the price of an inferior good like beer falls, the substitution effect leads to the consumer buying more of it because it becomes relatively cheaper compared to other goods. However, the income effect, for an inferior good, means that as the consumer effectively becomes wealthier due to the price drop, they may buy less of the inferior good, opting instead for more of a 'normal' good.

Question 20

A change in consumption of a good associated with a change in its price, with the level of utility held constant, is referred to as:

Accepted Answer

The change in consumption of a good associated with a change in its price, with the level of utility held constant, is referred to as the substitution effect. This is because consumers will substitute other goods for the good that has become relatively more expensive. The income effect refers to the change in consumption of a good associated with a change in purchasing power, and the wealth effect refers to the change in consumption of a good associated with a change in overall wealth. The total effect of a price change is the sum of both the substitution and income effects.

Quiz 4: Individual and Market Demand

Figure 4.2.1 -Refer to Figure 4.2.1 above. Starting at point A, which of the following moves represents the total effect of a price change?

Melissa's optimal consumption is indicated in the diagram below for three different income levels. For Melissa are park visits a normal or inferior good? Explain your answer.

Which of the following is true concerning the substitution effect of a decrease in price?

Figure 4.2.2 -Refer to Figure 4.2.2 above. Starting at point A, which of the following represents the substitution effect of an increase in the price of food?

A change in consumption of a good resulting from an increase in purchasing power, with relative prices held constant, is referred to as:

The response to a change in the relative prices of goods is called:

Figure 4.2.1 -Refer to Figure 4.2.1 above. Which of the following moves represents the substitution effect?

Figure 4.2.2 -Refer to Figure 4.2.2 above. The effect of a decrease in the price of food, as depicted in the figure, leads us to believe that:

For an inferior good, the income and substitution effects

A Giffen good

The change in demand resulting from this change in real purchasing power is called:

Figure 4.2.2 -Refer to Figure 4.2.2 above. Starting from point A, after the price of food decreases,, the quantity of food purchased:

Using the table below, construct an Engel Curve for each beer type.

After a good falls in price, consumers will tend to buy more of the good that has become cheaper and less of those goods that are now relatively more expensive. This fact is called:

Assume that beer is a normal good. If the price of beer rises, then the substitution effect results in the person buying of the good and the income effect results in the person buying of the good.

After a good falls in price, consumers are better off because they can buy the same amount of the good for less money, and thus have money left over for additional purchases. This fact is called:

Figure 4.2.3 -Refer to Figure 4.2.3 above. The effect of a decrease in the price of food, as depicted in the figure, leads us to believe that:

Figure 4.2.1 -Refer to Figure 4.2.1 above. Which of the following moves represents the income effect?

Assume that beer is an inferior good. If the price of beer falls, then the substitution effect results in the person buying of the good and the income effect results in the person buying of the good.

A change in consumption of a good associated with a change in its price, with the level of utility held constant, is referred to as: