Question 1

Wilhelm consumes only apples and bananas.His endowment is 5 units of apples and 10 units of bananas.Both goods are normal goods for Wilhelm.At current prices, Wilhelm is a net seller of apples.If the price of apples rises and the price of bananas stays the same, his demand for apples must decrease.

Accepted Answer

Although the price of apples rises, the income and substitution effects work in opposite directions. The substitution effect would lead to a decrease in apple consumption because apples have become relatively more expensive compared to bananas. However, since apples are a normal good and Wilhelm is a net seller of apples, the income effect from the increased revenue from selling apples could potentially increase his demand for apples, depending on the relative strengths of these two effects.

Question 2

A person's full income is the amount of income that he or she would have if there were no taxes.

Accepted Answer

Full income refers to the amount of income earned before any taxes or deductions are taken out. Therefore, the statement that "a person's full income is the amount of income that he or she would have if there were no taxes" is false.

Question 3

Bill receives half of his income in wages and half of his income in dividends.Bill would be indifferent between a 50% increase in his wage rate and a 50% increase in his dividend income.

Accepted Answer

A 50% increase in either his wage rate or his dividend income would not necessarily result in the same total income increase if the base amounts of his wages and dividends are different. The impact on total income depends on the actual amounts of wages and dividends, not just the percentage increase.

Question 4

If a person has no nonlabor income, a decrease in wages causes the budget line between leisure and other goods to shift downward in a parallel fashion.

Accepted Answer

A decrease in wages causes the budget line to pivot inward, not shift downward in a parallel fashion, because the slope of the budget line, which represents the trade-off between leisure and consumption, changes with the wage rate.

Question 5

If a consumer is a buyer of some goods and a seller of others, then a change in prices will generate an extra income effect in the Slutsky equation due to the revaluation of the consumer's endowment.

Accepted Answer

The extra income effect occurs when a price change of one good affects the demand for another good, leading to a revaluation of the consumer's endowment. If a consumer is both a buyer and seller of goods, a change in prices of both the bought and sold goods will cause a revaluation of their overall endowment and generate an extra income effect.

Question 6

Les is allowed to work only 8 hours a day at his main job, although he would like to work more hours.He takes a second job.He can work as many hours as he wishes at the second job, but at a lower wage.If leisure is a normal good, then an increase in the wage rate for his first job will reduce the number of hours he chooses to work at his second job.

Accepted Answer

As the wage rate for his first job increases, his opportunity cost of leisure increases. Therefore, he may choose to work fewer hours at both jobs, including the second job.

Question 7

If a person is a net seller of some good and the price of that good decreases, she might possibly become a net buyer.

Accepted Answer

If the price of the good decreases, the person may find it more affordable and may be inclined to purchase more of it, thus becoming a net buyer instead of a net seller.

Question 8

If leisure is an inferior good, then an increase in the wage rate will make a person work more.

Accepted Answer

If leisure is an inferior good, an increase in the wage rate will lead to a substitution effect where the person substitutes leisure with work, as leisure becomes relatively more expensive.

Question 9

If a utility maximizer is a net seller of something and the price of that good rises while other prices stay constant, her situation might improve so much that she becomes a net buyer.

Accepted Answer

A utility maximizer who is a net seller benefits from a price increase of the good they sell because it increases their income from sales, making them more likely to sell more rather than switch to becoming a net buyer.

Question 10

If all goods, including leisure, are normal goods, then an increase in the wage rate will necessarily make people want to work more hours.

Accepted Answer

An increase in the wage rate for normal goods, including leisure, can lead to a substitution effect where work is substituted for leisure because work becomes relatively more rewarding. However, there's also an income effect where individuals might choose to work less because they can maintain their standard of living with fewer hours worked. The overall effect on labor supply depends on the relative strength of these two effects.

Question 11

If someone has a Cobb-Douglas utility function and no income from any source other than labor earnings, then an increase in wages will not change the amount that person chooses to work.

Accepted Answer

The Cobb-Douglas utility function is a function that represents the utility or satisfaction that a consumer derives from consuming two goods. The function is given by U(x,y) = x^a * y^b, where x and y are the quantities of the two goods consumed, and a and b are positive constants.If a consumer has no income from any source other than labor earnings, then the consumer's budget constraint is given by I = w*L, where I is the consumer's income, w is the wage rate, and L is the amount of labor supplied.The consumer's optimal choice of labor supply is the amount of labor that maximizes the consumer's utility function subject to the budget constraint. The optimal choice of labor supply is given by L* = (a*I)/(w*(a+b)).If the wage rate increases, then the consumer's income will increase. This will lead to an increase in the consumer's optimal choice of labor supply. Therefore, an increase in wages will change the amount that the person chooses to work.

Question 12

Marsha Mellow is very flexible.She consumes x and y.She says, "Give me x or give me y, I don't care.I can't tell the difference between them." She is currently endowed with 8 units of x and 17 units of y.The price of x is 3 times the price of y.Marsha can trade x and y at the going prices but has no other source of income.How many units of y will Marsha consume?
A)17
B)44
C)25
D)41
E)21

Accepted Answer

Given Marsha's indifference between x and y, she will aim to maximize her total consumption of goods. Since the price of x is 3 times the price of y, she can trade her 8 units of x for 24 units of y (because 8x = 24y, given the price ratio). Adding these 24 units to her initial endowment of 17 units of y gives her a total of 41 units of y.

Question 13

If a rational utility maximizer is a net demander of a good and if an increase in its price causes him to buy more of it, then it must be an inferior good.

Accepted Answer

If a rational utility maximizer is a net demander of a good and if an increase in its price causes him to buy more of it, then it must be an inferior good. This is because an inferior good is a good for which demand decreases as income increases. In this case, the increase in price has caused the consumer to buy more of the good, which means that the good must be an inferior good.

Question 14

If a person is a net supplier of a normal good and its price increases while all other prices stay the same, then his demand for the good must decrease.

Accepted Answer

If a person is a net supplier of a normal good, it means that they supply more of the good than they consume themselves. Therefore, an increase in the price of the good would actually increase their income, and they may choose to supply even more of it. However, if the person is a net consumer of the good, then an increase in price would lead to a decrease in their demand for it.

Question 15

Jack has a backward-bending labor supply curve.At wages of $5 an hour he chooses to work 50 hours a week.His boss wants him to work more hours per week and offers him $5 an hour for the first 50 hours per week and $7 an hour for every hour beyond 50 hours per week.Because of his backward -bending supply curve, Jack might actually choose to work fewer hours.

Accepted Answer

The answer of Jack has a backward-bending labor supply curve.At...

Question 16

If a consumer is initially endowed with a positive amount of two goods and sells some of one to get more of the other and if she has no other sources of income, then her budget line will pass through her endowment point.

Accepted Answer

This is true because the endowment point represents the initial combination of goods that the consumer possesses, and if she sells some of one good to get more of the other, the total value of her bundle remains the same. Therefore, her budget line must pass through the endowment point, which is the starting point of her choice set.

Question 17

If leisure is a normal good, then an increase in nonlabor income will reduce labor supply.

Accepted Answer

If leisure is a normal good, then an increase in nonlabor income will increase the demand for leisure, thereby reducing labor supply. People will choose to work less and spend more time on leisure activities.

Question 18

Yoram insists on consuming 4 times as much of y as he consumes of x (so he always has y = 4x).He will consume these goods in no other ratio.The price of x is 3 times the price of y.Yoram has an endowment of 20 x's and 45 y's which he can trade at the going prices.He has no other source of income.What is Yoram's gross demand for x?
A)105
B)65
C)15
D)12
E)We can't determine the answer without knowing the price of x.

Accepted Answer

The answer of Yoram insists on consuming 4 times as...

Question 19

Suppose a consumer is initially endowed with a positive amount of two goods, sells some of one to get more of the other, and has no other sources of income.If the price of one good falls, his new budget line is everywhere above his old budget line.

Accepted Answer

When the price of one good falls, the consumer can afford more of that good for the same amount of money, effectively rotating the budget line outward from the axis of the good whose price has decreased. The new budget line is not everywhere above the old one; instead, it intersects the old budget line at the point representing the initial endowment.

Question 20

Marsha Mellow is very flexible.She consumes x and y.She says, "Give me x or give me y, I don't care.I can't tell the difference between them." She is currently endowed with 14 units of x and 3 units of y.The price of x is 3 times the price of y.Marsha can trade x and y at the going prices but has no other source of income.How many units of y will Marsha consume?
A)48
B)17
C)45
D)3
E)23

Accepted Answer

Marsha is indifferent between x and y, so she will consume the good that is relatively cheaper. The price of x is 3 times the price of y, so y is relatively cheaper. Marsha has 14 units of x and 3 units of y, so she can trade 1 unit of x for 3 units of y. She will trade 11 units of x for 33 units of y, leaving her with 3 units of x and 36 units of y.

Quiz 8: Buying and Selling-Part A