Question 1

Use a graph to demonstrate how an individual labour supply curve is derived.Is it possible to generate a labour supply curve that is downward-sloping for all wage rates? Explain what conditions must be satisfied for this to occur.

Accepted Answer

The answer of Use a graph to demonstrate how an...

Question 2

Graphically demonstrate the conditions associated with a consumer optimum.Carefully label all curves and axes.

Accepted Answer

The answer of Graphically demonstrate the conditions associated with a...

Question 3

A person consumes two goods: Coke and Snickers.Use a graph to demonstrate how the consumer adjusts his optimal consumption bundle when the price of Coke decreases.Carefully label all curves and axes.What will happen to consumption if Coke is a normal good?
What will happen to consumption if Coke is an inferior good? (Remember to explain the possible change when the income effect dominates and when the substitution effect dominates).

Accepted Answer

The answer of A person consumes two goods: Coke and...

Question 4

Explain the relationship between the budget constraint and an indifference curve at consumer optimum.

Accepted Answer

The answer of Explain the relationship between the budget constraint...

Question 5

Consider the following graphs depicting budget constraints, then answer the questions below.  
a.Which panel shows an increase in the price of X?
b.Does panel C show an increase or decrease in the price of good Y?
c.Which panel shows an increase in the consumers income, if prices remain unchanged?
d.Which panel - if any - shows an equally propionate decrease in the price of both goods?

Accepted Answer

The answer of Consider the following graphs depicting budget constraints,...

Question 6

Jonathan is planning ahead for retirement and must decide how much to spend and how much to save while he's working in order to have money to spend when he retires.When the substitution effect dominates the income effect, an increase in the interest rate on his savings is likely to:

Accepted Answer

When the substitution effect dominates the income effect, an increase in the interest rate makes saving more attractive compared to spending because the opportunity cost of consuming now (instead of saving) increases. Therefore, Jonathan is likely to save more.

Question 7

The income effect is weakly linked to what measure of elasticity?

Accepted Answer

The answer of The income effect is weakly linked to...

Question 8

Draw indifference curves that reflect the following preferences.For each one, determine whether it satisfies all of the standard properties of indifference curves.
a.pencils with white erasers and pencils with pink erasers
b.left shoes and right shoes
c.potatoes and rice
d.income and polluted water

Accepted Answer

The answer of Draw indifference curves that reflect the following...

Question 9

Janet knows that she will ultimately face retirement.Assume that Janet will experience two periods in her life, one in which she works and earns income, and one in which she is retired and earns no income.Janet can earn $250 000 during her work period and nothing in her retirement period.She must both save and consume in her work period, and can earn 10 per cent interest on her savings.
a.Use a graph to demonstrate Janet's budget constraint.
b.On your graph, show Janet at an optimal level of consumption in the work period equal to
$150 000.What is the implied optimal level of consumption in her retirement period?
c.Now, using your graph from part b above, demonstrate how Janet will be affected by an increase in the interest rate on savings to 15 per cent.Discuss the role of income and substitution effects in determining whether Janet will increase or decrease her savings in the work period.

Accepted Answer

The answer of Janet knows that she will ultimately face...

Question 10

Frida and Brent, two economists working on public policy, are discussing a compensation scheme to accompany the introduction of a new carbon tax.The scheme compensates households by giving them just enough money to put them back on the same indifference curve they were on before the introduction of the tax."This compensation scheme is pointless," proclaims Brent."If we put consumers back on the same indifference curve, they will purchase the same bundle of goods they did before and we won't achieve any reduction in carbon emissions."
"Nah, you're so wrong," argues Frida, "what matters is the relative prices of the goods.As long as they are different we can still lower carbon emissions"
Is Frida or Brent correct? Explain your reasoning.

Accepted Answer

The answer of Frida and Brent, two economists working on...

Question 11

Draw a budget constraint that is consistent with the following prices and income.Income = 100
PY = 25
PX = 12.5
a.Demonstrate how your original budget constraint would change if income increased to 250.
b.Demonstrate how your original budget constraint would change if PY decreased to 10.
c.Demonstrate how your original budget constraint would change if PX increased to 20.

Accepted Answer

The answer of Draw a budget constraint that is consistent...

Question 12

Using the graph shown, construct a demand curve for M&Ms, given an income of $10.

Accepted Answer

The answer of Using the graph shown, construct a demand...

Question 13

Using indifference curves and budget constraints, graphically illustrate the substitution and income effect that would result from a change in the price of one good.

Accepted Answer

The answer of Using indifference curves and budget constraints, graphically...

Question 14

Suppose you win a 'grocery-grab' at your local supermarket.This gives you 10 minutes to take as many groceries off the shelves as you can for free.Have you escaped the problem of scarcity in this situation?

Accepted Answer

The answer of Suppose you win a 'grocery-grab' at your...

Question 15

If an in-kind transfer forces the recipient to consume more of the good than he would choose with a cash transfer of equal value, then:

Accepted Answer

If the recipient is forced to consume more of the good than he would choose with a cash transfer, then he is losing out on the opportunity to use that money to purchase something he values more. Therefore, he would prefer a cash transfer of equal value that would allow him to use the money on a good or service he values more.

Question 16

Assume that a consumer faces the budget constraints shown.  
a.Assuming that income is the same on both occasions, describe the difference in relative prices between panel a and panel
b.
b.If income in panel b is $320, what is the price of good X?
c.If income in panel a is $175, what is the price of good Y?
d.Give an example of prices that may produce the graphs in panel A and panel B (hint: what are the relative prices?)

Accepted Answer

The answer of Assume that a consumer faces the budget...

Question 17

Which of the following statements about welfare assistance packages is true? An individual who receives food stamps:
(i) may be indifferent between food stamps and a cash transfer of equal dollar value
(ii) will always be better off with a cash transfer of equal dollar value
(iii) would always choose to spend less money on food with a cash transfer of equal dollar value

Accepted Answer

It is possible that some individuals who receive food stamps may value the convenience and assurance that the stamps will be used for food, and may not want to or be able to make choices about their spending. Therefore, they may be indifferent between receiving food stamps or a cash transfer of equal value. However, it is not true that they will always be better off with a cash transfer or that they would always choose to spend less money on food with a cash transfer.

Question 18

What is a Giffen good and does it conform to the law of demand.If not, why do economists still describe the law of demand as a law?

Accepted Answer

The answer of What is a Giffen good and does...

Quiz 22: The Theory of Consumer Choice