Question 1

When the price of a normal good falls, the substitution effect leads to _ in the quantity purchased and the income effect leads to in the quantity purchased.

Accepted Answer

For a normal good, when the price falls, the substitution effect causes consumers to buy more of the good because it is relatively cheaper compared to other goods. The income effect also leads to an increase in quantity purchased because the consumer feels effectively richer, allowing them to buy more of the good.

Question 2

Pizza is a normal good. When the price of a pizza decreases from $14 to $12,

Accepted Answer

Since pizza is a normal good, a decrease in price will increase the purchasing power of consumers. As a result, the income effect will mean people will buy more pizza.

Question 3

As the opportunity cost of a good falls, the substitution effect implies that people buy

Accepted Answer

When the opportunity cost of a good falls, it becomes relatively cheaper compared to its substitutes, leading people to buy more of that good and less of its substitutes.

Question 4

When the price of an inferior good falls, the substitution effect leads to in the quantity purchased and the income effect leads to in the quantity purchased.

Accepted Answer

The substitution effect causes consumers to buy more of the good as it becomes cheaper relative to other goods. However, for an inferior good, the income effect leads to a decrease in quantity purchased because as consumers feel effectively richer, they tend to buy less of the inferior good and more of other goods.

Question 5

Each point on the demand curve reflects

Accepted Answer

The demand curve shows the relationship between the price of a good and the quantity of that good that buyers are willing and able to purchase. Therefore, each point on the demand curve reflects the highest price consumers are willing and able to pay for that particular unit of a good.

Question 6

Which of the following explains why demand curves slope downward?

Accepted Answer

The substitution effect and income effect both contribute to the downward slope of the demand curve. The substitution effect states that as the price of a good increases, consumers will switch to a cheaper substitute, causing a decrease in demand for the original good. The income effect states that as the price of a good decreases, consumers' purchasing power increases, allowing them to purchase more of the good, causing an increase in demand. Together, these effects lead to a downward sloping demand curve.

Question 7

When the price of a pizza decreases from $14 to $12,

Accepted Answer

When the price of pizza decreases, consumers have more purchasing power with the same amount of money, which is the income effect, leading them to potentially buy more pizza.

Question 8

The price of cereal rises. As a result, people have cereal for breakfast on fewer days and eat eggs instead. This behavior is an example of

Accepted Answer

The rise in the price of cereal leads people to substitute cereal with eggs for breakfast. This means that the quantity demanded of cereal decreases due to the substitution effect, which is captured in option D. Option A incorrectly refers to a decrease in the quantity supplied of cereal, which is a result of a change in the producer's behavior rather than the consumer's. Option B refers to an increase in the quantity demanded of eggs due to the income effect, which is irrelevant in this situation as the price of eggs has not changed. Option C is also incorrect, as there is no reason for the quantity supplied of eggs to increase in this situation - this is not an example of a supply-side response to the change in the demand for cereal.

Question 9

The law of demand implies that if nothing else changes, there is

Accepted Answer

The law of demand states that there is an inverse or negative relationship between the price of a good and the quantity demanded, i.e. when the price of a good increases, demand for that good will decrease, and vice versa. Therefore, option A is the correct choice.

Question 10

When the price of a pizza decreases from $12 to $10, it is definitely the case that the

Accepted Answer

According to the law of demand, as the price of a good decreases, the quantity demanded of that good will increase, assuming everything else (such as income) remains constant. The substitution effect refers to the idea that when the price of a good decreases, people will choose to buy more of that good and less of other goods that are now relatively more expensive. In this case, as the price of pizza decreases, people may choose to buy more pizza and less of other foods. Therefore, the correct answer is A) substitution effect means people buy more pizza.

Question 11

If the price of an apple increases,

Accepted Answer

An increase in the price of an apple would make other goods relatively less expensive in comparison, leading to an increase in their consumption. This leads to a higher opportunity cost of consuming apples, as one must give up more of these other goods to obtain the same quantity of apples as before.

Question 12

Which of the following will occur in the market for soft drinks if the money price of soft drinks incre
I. The relative price of soft drinks increases.
II. The substitution effect may cause people to switch to drinking bottled water.

Accepted Answer

If the money price of soft drinks increases, then the relative price of soft drinks increases as well (I). This means that soft drinks become relatively more expensive compared to other goods. As a result, the substitution effect may cause people to switch to drinking bottled water as a substitute for soft drinks (II). Therefore, both I and II are correct.

Question 13

If the price of an apple increases from 50¢ to 60¢, the quantity demanded will decrease because of

Accepted Answer

The increase in price will lead to both substitution effect (consumers will shift to cheaper alternatives) and income effect (consumers will feel poorer). Both of these effects will lead to a decrease in the quantity demanded.

Question 14

Which of the following influences people's buying plans and does not shift the demand curve?

Accepted Answer

The price of the good itself influences the quantity demanded but does not shift the demand curve; it causes movement along the curve.

Question 15

The negative slope of the demand curve indicates that there is relationship between the price and the quantity demanded.

Accepted Answer

The negative slope of the demand curve indicates an inverse relationship between the price and the quantity demanded. This means that as the price of a good or service increases, the quantity demanded of that good or service will decrease. Alternatively, as the price of a good or service decreases, the quantity demanded of that good or service will increase.

Question 16

In the market for magazines, the "income effect" means that

Accepted Answer

The income effect refers to how changes in income affect consumer purchasing power. Therefore, an increase in the price of magazines (assuming income remains the same) would reduce the total purchasing power of magazine readers, making them able to afford fewer magazines. This is known as the income effect.

Question 17

The ABC Music club charges a price of $16 for a CD and $8 for a cassette. Both CDs and cassettes are normal goods. If the ABC Music club increases the price of a CD to $18, everything else remaining the same, the

Accepted Answer

The income effect reduces the demand for both CDs and cassettes because the price increase makes consumers feel poorer. The substitution effect induces consumers to buy more cassettes and fewer CDs because cassettes are now relatively cheaper than CDs.

Question 18

The "income effect" in the market for aspirin means that

Accepted Answer

The income effect refers to how a change in the price of a good affects the purchasing power of consumers. If the price of aspirin increases, consumers will have less money to spend on other goods, including aspirin. This is because their total purchasing power has decreased. Therefore, the correct answer is D.

Question 19

When the price of a good falls, the income effect for a normal good implies that people buy

Accepted Answer

When the price of a good falls, consumers have more real income or purchasing power, allowing them to buy more of all goods, including the normal good in question.

Question 20

When the price of a good falls, the income effect for an inferior good implies that people will buy

Accepted Answer

For an inferior good, the income effect implies that as the price falls and real income increases, people buy less of the good because they can now afford to buy more of other preferred goods.

Quiz 3: Demand and Supply