Question 1

Good A is an inferior good. If the price of good A were to suddenly double, the substitution effect would cause the purchases of good A to increase by

Accepted Answer

The substitution effect typically causes the quantity demanded of a good to decrease when its price increases, even for inferior goods. Therefore, the purchases of good A would not increase.

Question 2

Scenario 4.1:
Daniel derives utility from only two goods, cake (Qc) and donuts (Qd). The marginal utility that Daniel receives from cake (MUc) and donuts (MUd) are given as follows:
MUc = Qd MUd = Qc
Daniel has an income of $240 and the price of cake (Pc) and donuts (Pd) are both $3.
-See Scenario 4.1. What quantity Qc will maximize Daniel's utility given the information above?

Accepted Answer

To maximize utility, Daniel should consume the quantity of cake and donuts where the marginal utility per dollar spent is equal for both goods. This can be calculated as follows:
MUc / Pc = MUd / Pd
Substituting the given marginal utilities and prices, we get:
Qd / 3 = Qc / 3
Simplifying, we get:
Qc = Qd
Since Daniel's total income is $240 and both goods cost $3, we can also write:
240 = 3Qc + 3Qd
Substituting Qd = Qc, we get:
240 = 6Qc
Solving for Qc, we get:
Qc = 40
Therefore, the quantity of cake that will maximize Daniel's utility is 40.

Question 3

As a group, U.S. consumers have no income response for their consumption of ice cream so that the income elasticity of demand for ice cream equals zero. Does this mean that the change in ice cream consumption that results from a price increase is entirely composed of the substitution effect?

Accepted Answer

If the income elasticity of demand is zero, it means that changes in income do not affect the quantity demanded. Therefore, any change in consumption due to a price change is solely due to the substitution effect, as the income effect is zero.

Question 4

Suppose you only consume rice and bananas. Can both of these goods be Giffen goods in your consumption?

Accepted Answer

The answer of Suppose you only consume rice and bananas....

Question 5

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 6

The Russian government wants to reduce the consumption of vodka. A one hundred rouble tax on each bottle purchased may reduce the consumption of vodka under which circumstance(s)?

Accepted Answer

A tax on vodka increases its price, which typically reduces consumption if vodka is a normal good. Rebating taxes to consumers can offset the financial burden, but the price increase still discourages consumption.

Question 7

Figure 4.2
A consumer's original utility maximizing market basket of goods is shown in Figure 4.2 as point A. Following a price change, the consumer's utility maximizing market basket is at point B.
-Refer to Figure 4.2. The income effect on the quantity of clothing purchased is:

Accepted Answer

The answer of  Figure 4.2
A consumer's original utility maximizing...

Question 8

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 9

You have just won a cash award of $500 for academic excellence.

Accepted Answer

The income effect of the award will be larger than its substitution effect because the individual's income has increased. The substitution effect would only come into play if the award had induced the individual to change their behavior in terms of how much they study or how they allocate their time between academic and non-academic activities. However, there is no indication that the award has incentivized any such changes.

Question 10

Figure 4.1
A consumer's original utility maximizing market basket of goods is shown in Figure 4.1 as point A. Following a price change, the consumer's utility maximizing market basket changes is at point B.
-Refer to Figure 4.1. The income effect of the price change in food on the quantity of food purchased is:

Accepted Answer

The income effect is the change in consumption resulting from a change in real income, which is represented by the movement from F2 to F1 after the price change.

Question 11

Figure 4.1
A consumer's original utility maximizing market basket of goods is shown in Figure 4.1 as point A. Following a price change, the consumer's utility maximizing market basket changes is at point B.
-Based on Figure 4.1, food is:

Accepted Answer

Food is a normal good because the demand for food increases as income increases.

Question 12

Suppose the price of rice increases and you view rice as an inferior good. The substitution effect results in a ________ change in rice consumption, and the income effect leads to a ________ change in rice consumption.

Accepted Answer

If rice is an inferior good, the substitution effect and income effect work in opposite directions. The substitution effect would lead to a decrease in rice consumption as consumers switch to cheaper substitute goods. The income effect would lead to an increase in rice consumption as consumers' real income decreases with the rise in the price of rice. The net effect would depend on which of these two effects is stronger. In this case, as rice is an inferior good, the negative substitution effect is likely to be stronger than the positive income effect, leading to an overall decrease in rice consumption. Therefore, the best answer is C, negative substitution effect and positive income effect.

Question 13

Scenario 4.1:
Daniel derives utility from only two goods, cake (Qc) and donuts (Qd). The marginal utility that Daniel receives from cake (MUc) and donuts (MUd) are given as follows:
MUc = Qd MUd = Qc
Daniel has an income of $240 and the price of cake (Pc) and donuts (Pd) are both $3.
-See Scenario 4.1. Holding Daniel's income and Pd constant at $240 and $3 respectively, what is Daniel's demand curve for cake?

Accepted Answer

We can use the equation for consumer equilibrium to find Daniel's demand curve for cake:

MUc/Pc = MUd/Pd

Substituting the given marginal utility functions and prices:

Qd/Pc = Qc/Pd

Solving for Qd and substituting income and Pd:

Qd = (240 - 3Qc)/3

Substituting Qd back into the demand curve equation:

Qc = (240 - 3Qc)/9

Simplifying:

Qc = 240/ (3 + Pc)

Therefore, the demand curve for cake is Qc = 240/(3 + Pc). The correct answer is D.

Question 14

Your indifference curves for good X (horizontal axis) and good Y (vertical axis) are vertical lines because you do not gain any satisfaction from consumption of Y. As the price of X declines, the change in consumption of X is entirely composed of the:

Accepted Answer

The income effect is the change in consumption of a good due to a change in real income. In this case, the price of X declines, which increases real income. As a result, the consumption of X will increase. The substitution effect is the change in consumption of a good due to a change in its relative price. In this case, the price of X declines, which makes it relatively cheaper than Y. As a result, the consumption of X will increase. However, since the indifference curves are vertical lines, the substitution effect is zero. Therefore, the change in consumption of X is entirely composed of the income effect.

Question 15

Figure 4.1
A consumer's original utility maximizing market basket of goods is shown in Figure 4.1 as point A. Following a price change, the consumer's utility maximizing market basket changes is at point B.
-Refer to Figure 4.1. The substitution effect of the price change in food on the quantity of food purchased is:

Accepted Answer

The substitution effect occurs when the consumer switches from the original market basket (point A) to a new market basket (point B) due to the price change. In this case, the price of food must have increased since the consumer has reduced the quantity of food consumed (from F3 to F2) and increased the quantity of clothing consumed (from C1 to C2) to achieve the same level of utility at point B. Therefore, the best choice is B, the change from F3 to F2.

Question 16

Figure 4.2
A consumer's original utility maximizing market basket of goods is shown in Figure 4.2 as point A. Following a price change, the consumer's utility maximizing market basket is at point B.
-Refer to Figure 4.2. The substitution effect on the quantity of clothing purchased is:

Accepted Answer

The substitution effect is the change in quantity demanded due to a change in relative prices, holding utility constant. It is represented by the movement from the original consumption point (C1) to the new point on the same indifference curve (C2) after adjusting for the price change.

Question 17

Figure 4.2
A consumer's original utility maximizing market basket of goods is shown in Figure 4.2 as point A. Following a price change, the consumer's utility maximizing market basket is at point B.
-Based Figure 4.2, clothing is:

Accepted Answer

In Figure 4.2, the price of clothing has decreased, resulting in the consumer moving to a higher indifference curve and consuming more of both goods. This implies that clothing is a normal good, as the consumer is buying more of it as their income has more purchasing power. It is not a Giffen good as the consumer did not decrease their consumption of clothing despite its lower price.

Question 18

Scenario 4.1:
Daniel derives utility from only two goods, cake (Qc) and donuts (Qd). The marginal utility that Daniel receives from cake (MUc) and donuts (MUd) are given as follows:
MUc = Qd MUd = Qc
Daniel has an income of $240 and the price of cake (Pc) and donuts (Pd) are both $3.
-See Scenario 4.1. What is Daniel's budget constraint?

Accepted Answer

Daniel's budget constraint can be expressed as:
240 = (Pc)(Qc) + (Pd)(Qd)
240 = 3Qc + 3Qd
This is because both cake and donuts have the same price and the income is being used to purchase both goods. To maximize utility, Daniel should allocate his income such that the marginal utility per dollar spent on each good is equal. From the given marginal utility functions, this means:
MUc/Pc = MUd/Pd
Qd/Qc = Pc/Pd
Substituting Pc = Pd = 3, we get:
Qd/Qc = 1
This implies that Daniel should consume equal quantities of cake and donuts to maximize utility, i.e. Qc = Qd = 80.

Question 19

Good A is a Giffen good. If the price of good A were to suddenly double, the income effect would cause the purchases of good A to increase by

Accepted Answer

For a Giffen good, the income effect is negative. If the price of good A were to suddenly double, the income effect would cause the purchases of good A to decrease. However, the substitution effect would cause the purchases of good A to increase. The overall effect on the purchases of good A is ambiguous and could be either an increase or a decrease.

Question 20

Scenario 4.1:
Daniel derives utility from only two goods, cake (Qc) and donuts (Qd). The marginal utility that Daniel receives from cake (MUc) and donuts (MUd) are given as follows:
MUc = Qd MUd = Qc
Daniel has an income of $240 and the price of cake (Pc) and donuts (Pd) are both $3.
-See Scenario 4.1. What is Daniel's income-consumption curve?

Accepted Answer

Since the marginal utility of cake and donuts are equal to the quantity of the other good, we can assume that Daniel will allocate his income equally between the two goods to maximize his utility. With an income of $240 and both goods priced at $3, Daniel can afford to purchase a total of 80 units of either good. Therefore, his consumption bundle will be evenly split between cake and donuts, resulting in a linear income-consumption curve where Qc = Qd.

Quiz 4: Individual and Market Demand

Good A is an inferior good. If the price of good A were to suddenly double, the substitution effect would cause the purchases of good A to increase by

As a group, U.S. consumers have no income response for their consumption of ice cream so that the income elasticity of demand for ice cream equals zero. Does this mean that the change in ice cream consumption that results from a price increase is entirely composed of the substitution effect?

Suppose you only consume rice and bananas. Can both of these goods be Giffen goods in your consumption?

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.

The Russian government wants to reduce the consumption of vodka. A one hundred rouble tax on each bottle purchased may reduce the consumption of vodka under which circumstance(s) ?

Figure 4.2 A consumer's original utility maximizing market basket of goods is shown in Figure 4.2 as point A. Following a price change, the consumer's utility maximizing market basket is at point B. -Refer to Figure 4.2. The income effect on the quantity of clothing purchased is:

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.

You have just won a cash award of $500 for academic excellence.

Figure 4.1 A consumer's original utility maximizing market basket of goods is shown in Figure 4.1 as point A. Following a price change, the consumer's utility maximizing market basket changes is at point B. -Based on Figure 4.1, food is:

Suppose the price of rice increases and you view rice as an inferior good. The substitution effect results in a change in rice consumption, and the income effect leads to a change in rice consumption.

Your indifference curves for good X (horizontal axis) and good Y (vertical axis) are vertical lines because you do not gain any satisfaction from consumption of Y. As the price of X declines, the change in consumption of X is entirely composed of the:

Figure 4.2 A consumer's original utility maximizing market basket of goods is shown in Figure 4.2 as point A. Following a price change, the consumer's utility maximizing market basket is at point B. -Refer to Figure 4.2. The substitution effect on the quantity of clothing purchased is:

Figure 4.2 A consumer's original utility maximizing market basket of goods is shown in Figure 4.2 as point A. Following a price change, the consumer's utility maximizing market basket is at point B. -Based Figure 4.2, clothing is:

Good A is a Giffen good. If the price of good A were to suddenly double, the income effect would cause the purchases of good A to increase by