Deck 9: Demand for Goods and Supply of Labor and Capital

Question 1

Goods like exclusive designer clothes carry with them prestige value linked to their price.As a result,some people demand more of such goods as the price increases.For those people,such goods are Giffen goods.

Answer 1

False
These are luxury goods that are composed of both the physical good as well as the prestige value associated with it.When price increases prestige value,the nature of the good changes when price increases -- but the good itself is still a normal good in the sense that,were the prestige value to stay constant,an increase in price leads to less quantity demanded.

Question 2

If future consumption is a normal good,the interest rate/borrowing relationship cannot be upward sloping.

Answer 2

True
An increase in the interest rate causes a substitution effect in the direction of less borrowing.If future consumption is a normal good,it will cause an additional wealth effect in the direction of less borrowing.

Question 3

The cross-price demand curve for Cobb-Douglas tastes is perfectly vertical.

Answer 3

True

Question 4

If a good is quasilinear,its own-price demand curve is vertical.

Question 5

An increase in the price of good 2 will cause the demand curve for good 1 to shift out.

Question 6

A downward sloping income-demand curve indicates that the good is a necessity.

Question 7

Suppose your tastes over consumption and leisure have constant elasticity of substitution.I observe that,when your wage went up,you continued to work the same number of hours.From this,I can conclude that you have Cobb-Douglas tastes.

Question 8

For the same sized substitution effect,own-price demand curves for inferior goods are steeper than own price demand curves for normal goods.

Question 9

If tastes are homothetic in leisure and consumption,labor supply curves slope up.

Question 10

The empirically observed backward-bending labor supply curve cannot arise from homothetic tastes.

Question 11

Leisure being an inferior good is necessary but not sufficient for labor supply to slope up.

Question 12

Assuming the same sized substitution effect,normal goods have steeper cross-price demand curves than inferior goods.

Question 13

Leisure being a normal good is neither necessary nor sufficient for labor supply to slope up.

Question 14

When tastes are quasilinear in leisure,the labor supply curve is vertical.

Question 15

Unless a good is a Giffen good,the demand curve shifts to the right as income rises.

Question 16

Suppose that utility over consumption and leisure takes the constant elasticity of substitution form $u ( \ell , c ) = \left( \alpha \ell ^ { - \rho } + ( 1 - \alpha ) c ^ { - \rho } \right) ^ { - 1 / \rho }$ .If $\rho$ falls between 0 and -1,then the labor supply curve is backward bending.

Question 17

In order for someone to switch from borrowing to saving when the interest rate falls,it must be that current consumption is an inferior good.

Question 18

Suppose your tastes can be represented by the utility function .Your demand function for is

Question 19

Since income and substitution effects point in the same direction for normal goods,the leisure demand curve will be shallower if leisure is a normal good than if leisure is an inferior good.

Question 20

Suppose your tastes can be represented by the utility function .Your demand for is

Question 21

Consider a consumer who consumes only and .The price of falls.
a.On a graph with
on the horizontal and
on the vertical axis,illustrate the change in this consumer's budget constraint assuming exogenous income I.
b.Illustrate income and substitution effects for
assuming that both goods are normal.
c.Can you tell whether the cross-price demand curve for
is upward or downward sloping?
d.Suppose
is leisure hours and
is a composite consumption good.Consider an increase in the wage assuming a fixed endowment of leisure (and no exogenous source of income).How is your graph similar and how is it different from what you graphed in (a)through (c)?
e.Is the leisure-demand curve a cross-price demand curve? Why or why not?

Question 22

Suppose your utility function is given by .What is your demand function for ?