Question 1

If the Laspeyres quantity index exceeds 1, then:
A)the consumption bundle in period 1 is preferred to that of period 0.
B)both consumption bundles are equally preferred.
C)the consumption bundles cannot be compared.
D)the consumption bundle in period 0 is preferred to that of period 1.

Accepted Answer

If the Laspeyres quantity index exceeds 1, it means that the quantity of goods and services consumed in period 1 is greater than the quantity consumed in period 0, using period 0 prices as weights. This indicates that the consumer is better off in period 1 as they are able to consume a larger amount of goods and services. Therefore, the consumption bundle in period 1 is preferred to that of period 0.

Question 2

The compensated demand curve is obtained by:
A)minimizing expenditure.
B)maximizing utility.
C)keeping the money income constant.
D)compensating the consumer from the loss in utility.

Accepted Answer

The compensated demand curve is derived by minimizing expenditure while maintaining a constant level of utility, reflecting how much of a good a consumer would buy if compensated for price changes to keep utility unchanged.

Question 3

Figure 4A

-The income effect in Figure 4A is from:
A)point F to point H.
B)point A to point C.
C)point E to point F.
D)point E to point H.

Accepted Answer

The income effect is the change in quantity demanded due to a change in income. In Figure 4A, the income effect is from point F to point H because this is the change in quantity demanded due to the change in income from Y1 to Y2.

Question 4

For a normal good the total effect is given by:
A)the income effect.
B)the income effect plus the substitution effect.
C)the substitution effect.
D)the income effect minus the substitution effect.

Accepted Answer

For a normal good, the total effect of a change in price is the sum of the income effect and the substitution effect. The income effect is the change in quantity demanded due to a change in purchasing power, while the substitution effect is the change in quantity demanded due to a change in relative prices. Therefore, the correct answer is B, the income effect plus the substitution effect.

Question 5

Speculation:
A)is just an example of law of demand at work.
B)makes output fluctuate wildly.
C)is bad because it makes prices higher.
D)always lead to someone losing.

Accepted Answer

Speculation is an example of the law of demand at work because it shows how changes in price can lead to changes in quantity demanded.

Question 6

If the prices of two goods are equal then, for a utility maximizer:
A)the demand curves for the two goods are identical.
B)the quantity consumed of the two goods is equal.
C)the marginal values of the two goods are equal.
D)the total values of the two goods are equal.

Accepted Answer

If the prices of two goods are equal, a utility maximizer will choose to consume equal amounts of both goods until the marginal values of the two goods are equal. This is because consuming more of one good and less of the other would lead to a decrease in the marginal value of the former and an increase in the marginal value of the latter, creating a differential in the marginal values of the two goods. Therefore, choice C is correct.

Question 7

A time constraint defines:
A)all of the feasible allocations of time between leisure and work.
B)all of the optimal allocation of time between leisure and work.
C)all the foregone allocations of time between leisure and work.
D)all of allocations of time between leisure and work for which the individual is indifferent.

Accepted Answer

A time constraint defines all of the feasible allocations of time between leisure and work, which means it sets the boundary for what is possible in terms of dividing time between work and leisure. The other options are not accurate definitions of a time constraint.

Question 8

The law of demand holds when:
A)income elasticity is negative.
B)other prices are not held constant.
C)speculators enter the market.
D)tastes are changing.

Accepted Answer

The answer of The law of demand holds when:
A)income elasticity...

Question 9

If a good is inferior and demand is downward sloping, then:
A)the substitution effect is equal to the income effect.
B)the substitution effect is larger than the income effect.
C)price and quantity demanded move in the same direction.
D)the substitution effect is smaller than the income effect.

Accepted Answer

For an inferior good with a downward-sloping demand, the substitution effect (which always leads to an increase in quantity demanded when price falls) is larger than the income effect (which leads to a decrease in quantity demanded for inferior goods when income increases).

Question 10

Joe's utility function is given by U(x,y)= min[x,y] . The price of x is $4 and the price of y is $2 and Joe's income is $12. If the price of x decreases to $2 but Joe's income stays constant, then:
A)the substitution effect is zero.
B)the substitution effect exceeds the income effect.
C)the income effect is zero.
D)the total effect is zero.

Accepted Answer

Since the price of x decreases and the income stays constant, Joe will substitute x for y to maximize his utility. However, the decrease in the price of x means that Joe can buy more of both goods while staying within his budget constraint. Therefore, the income effect and substitution effect offset each other, resulting in a zero net effect on the quantity demanded of x. Therefore, the substitution effect is zero.

Question 11

If a good is neither normal nor inferior, then:
A)there is no EV.
B)EV is larger than CV.
C)EV is smaller than CV.
D)EV and CV are the same.

Accepted Answer

If a good is neither normal nor inferior, it means that a change in income will not affect the demand for the good (i.e. income elasticity of demand is zero). Therefore, both the EV and CV will be the same, as the price elasticity of demand is also zero (i.e. the change in quantity demanded is proportionate to the change in price). This means that the percentage change in price is equal to the percentage change in quantity demanded, and thus the EV and CV will be identical.

Question 12

For inferior goods the income effect is:
A)unrelated to the price.
B)negatively related to the price.
C)positively related to the price.
D)ambiguously related to the price.

Accepted Answer

For inferior goods, as income increases, the quantity demanded decreases. When the price of an inferior good decreases, the consumer feels richer, leading to a decrease in demand due to the negative income effect. Thus, the income effect is positively related to the price.

Question 13

If a good is normal, then:
A)the income effect is larger than the substitution effect.
B)the income effect moves in the same direction as the substitution effect.
C)the income effect moves in the opposite direction of the substitution effect.
D)the income and substitution effects are ambiguous.

Accepted Answer

When a good is normal, the income effect and substitution effect move in the same direction. As income rises, the consumer will buy more of the normal good because they have more money to spend. This is the income effect. At the same time, the price of the normal good will seem relatively cheaper, causing the consumer to substitute it for other goods. This is the substitution effect. Since both effects move in the same direction, the answer is B.

Question 14

When people spend their time standing in line- ups to acquire such things as a racquetball court, they are:
A)paying for an underpriced good with time rather than money.
B)spending more than the good is worth.
C)wasting the scarce resource of time.
D)just hanging around.

Accepted Answer

When people spend their time standing in line to acquire goods or services, such as a racquetball court, they are essentially paying for an underpriced good with their time instead of money. This is because the good or service is priced lower than its market value, leading to excess demand and thus, long lines.

Question 15

When a fixed charge is included in the price of high and low quality goods, more high quality goods are consumed because:
A)high quality just got more expensive.
B)people like high quality.
C)the relative price of high quality goods is higher.
D)the relative price of high quality goods is lower.

Accepted Answer

The inclusion of a fixed charge in the price of goods makes high-quality goods relatively cheaper compared to low-quality goods. This is because the fixed charge represents a smaller proportion of the total cost for high-quality goods than for low-quality goods, effectively lowering the relative price of high-quality goods and making them more attractive to consumers.

Question 16

For normal goods the income effect is:
A)ambiguously related to the price.
B)positively related to the price.
C)negatively related to the price.
D)unrelated to the price.

Accepted Answer

For normal goods, as the price decreases, the consumer's purchasing power increases, leading to an increase in quantity demanded (the substitution effect) and an increase in the consumer's real income. The increase in real income, in turn, leads to an increase in demand (the income effect). Therefore, the income effect is negatively related to the price.

Question 17

A round of golf at the Capilano Golf Club costs $75, and consumes four hours of the golfer's time. If the golfer has $100 of non- labour income per day and a wage rate equal to $50 per hour, the full price of a round of golf is:
A)$275.
B)$300.
C)$75.
D)$375.

Accepted Answer

The full price includes the direct cost of $75 plus the opportunity cost of the time spent golfing, which is 4 hours at $50 per hour ($200). So, $75 + $200 = $275.

Question 18

For an inferior good:
A)the income effect is positive when the price decreases.
B)the income effect is negative when the price increases.
C)the income effect is zero when the price increases.
D)the income effect is positive when the price increases.

Accepted Answer

The answer of For an inferior good:
A)the income effect is...

Question 19

When EV = CV = CS:
A)the good is Giffen.
B)the good is neither normal nor inferior.
C)the good is inferior.
D)the good is normal.

Accepted Answer

When EV (Equivalent Variation), CV (Compensating Variation), and CS (Consumer Surplus) are equal, it indicates that the good is neither normal nor inferior, as these measures reflect the consumer's valuation of changes in price or income without indicating the nature of the good.

Question 20

Joe's utility function is given by U(x,y)= min[x,y]. The price of x is $4 and the price of y is $2 and Joe's income is $12. If the price of x decreases to $2 but Joe's income stays constant, then:
A)the substitution effect is equal to 3.
B)the substitution effect is equal to 2.
C)the substitution effect is zero.
D)the substitution effect is equal to 1.

Accepted Answer

Joe's utility function U(x,y) = min[x,y] indicates perfect complements, meaning he consumes x and y in equal quantities. When the price of x decreases, Joe will still consume x and y in equal amounts, so there is no substitution effect.

Quiz 4: More Demand Theory

If the Laspeyres quantity index exceeds 1, then:

The compensated demand curve is obtained by:

Figure 4A -The income effect in Figure 4A is from:

For a normal good the total effect is given by:

Speculation:

If the prices of two goods are equal then, for a utility maximizer:

A time constraint defines:

The law of demand holds when:

If a good is inferior and demand is downward sloping, then:

Joe's utility function is given by U(x,y) = min[x,y] . The price of x is $4 and the price of y is $2 and Joe's income is $12. If the price of x decreases to $2 but Joe's income stays constant, then:

If a good is neither normal nor inferior, then:

For inferior goods the income effect is:

If a good is normal, then:

When people spend their time standing in line- ups to acquire such things as a racquetball court, they are:

When a fixed charge is included in the price of high and low quality goods, more high quality goods are consumed because:

For normal goods the income effect is:

A round of golf at the Capilano Golf Club costs $75, and consumes four hours of the golfer's time. If the golfer has $100 of non- labour income per day and a wage rate equal to $50 per hour, the full price of a round of golf is:

For an inferior good:

When EV = CV = CS:

Joe's utility function is given by U(x,y) = min[x,y]. The price of x is $4 and the price of y is $2 and Joe's income is $12. If the price of x decreases to $2 but Joe's income stays constant, then: