Question 1

Based on the diagram below it can be inferred that:

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The answer of Based on the diagram below it can...

Question 2

Use the following two statements in answering this question: I.For all Giffen goods the substitution effect is larger than the income effect.
II.For all inferior goods the substitution effect is larger than the income effect.

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The answer of Use the following two statements in answering...

Question 3

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

Accepted Answer

The substitution effect will always lead to an increase in consumption, regardless of whether the good is normal, inferior, or a Giffen good. When the price of a good decreases, consumers will switch from purchasing more expensive goods to purchasing more of the cheaper good, leading to an increase in consumption.

Question 4

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

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The answer of Good A is a Giffen good.If the...

Question 5

Use the following two statements in answering this question: I.All Giffen goods are inferior goods.
II.All inferior goods are Giffen goods.

Accepted Answer

Statement I is true because Giffen goods are a type of inferior goods. However, statement II is false because not all inferior goods are Giffen goods. Giffen goods are a very specific type of inferior good in which the demand increases as the price increases, which is not true for all inferior goods. Therefore, the correct answer is B.

Question 6

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 represents the change in the quantity demanded of a good due to a change in its relative price while holding the level of utility constant. In this case, the price of food has decreased, leading the consumer to purchase more food. The substitution effect can be seen as the movement from the original bundle (point A) to the new bundle on the new budget line (point B), which is represented by the change from F3 to F2. Therefore, the correct answer is B.

Question 7

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

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Question 8

Which of the following describes the Giffen good case? When the price of the good

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Question 9

Suppose that a consumer regards two types of soap as perfect substitutes for one another.The price consumption path generated by changing the price of one type of soap

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Question 10

Use the following statements to answer this question: I.The income-consumption curve for perfect complements is a straight line.
II.The price-consumption curve for perfect complements is a straight line.

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The answer of Use the following statements to answer this...

Question 11

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 12

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 13

Jon's income-consumption curve is a straight line from the origin with a positive slope.Now suppose that Jon's preferences change such that his income-consumption curve remains a straight line but rotates 15 degrees clockwise.Jon's demand curve for the good on the horizontal axis

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The answer of Jon's income-consumption curve is a straight line...

Question 14

Good A is a normal good.The demand curve for good A:

Accepted Answer

A normal good is a good for which demand increases as income increases. This means that as consumers' incomes increase, they are willing and able to buy more of the good at every price level, causing the demand curve to slope downward.

Question 15

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

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The answer of Good A is an inferior good.If the...

Question 16

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 17

The substitution effect of a price change for product X is the change in consumption of X associated with a change in

Accepted Answer

The substitution effect measures the change in consumption of a good when its price changes with the level of utility held constant, meaning that the consumer is still aiming to maximize their satisfaction or wellbeing, and will switch to a relatively cheaper substitute good if the price of the original good increases.

Question 18

The change in the quantity demanded of a good resulting from a change in relative price with the level of satisfaction held constant is called the __________ effect.

Accepted Answer

The substitution effect occurs when the price of a good changes, causing consumers to substitute the now relatively more expensive good with a similar, relatively cheaper one. It assumes that consumer preferences remain constant, but they are simply responding to the change in relative prices.

Question 19

A Giffen good

Accepted Answer

A Giffen good is a special type of inferior good in which the income effect dominates the substitution effect. This means that as the price of the good increases, the consumer's real income decreases, leading to a greater demand for the inferior good, even though its price has increased. A Giffen good must have an upward sloping demand curve, which is different from the usual downward sloping demand of most goods.

Question 20

Your income response for bicycle riding changes with the amount of income you earn.At low levels of income,you view bicycle riding as an inferior good and substitute other types of transportation (e.g.,auto travel)as your income rises.However,you view bicycle riding as a normal good after your income rises above a particular level.What shape does your Engel curve for bicycle riding have?

Accepted Answer

The Engel curve for bicycle riding would have a C-shape because initially as income increases, demand for bicycle riding decreases (inferior good), but eventually demand for bicycle riding will increase (normal good) as income continues to rise.

Quiz 4: Individual and Market Demand