Question 1

Suppose when the consumer's income rises by 100%, the consumer's consumption of good $x$ falls by 1%. We can infer that the consumer's income elasticity for good $x$ is:

Accepted Answer

The income elasticity of demand is defined as the percentage change in quantity demanded of a good divided by the percentage change in income. 
Using the information given, we know that the percentage change in income is 100% and the percentage change in quantity demanded is -1%. Therefore, the income elasticity of demand is (-1%)/(100%) = -0.01. This matches answer choice B. We know that income elasticity of demand is the percentage change in demand divided by the percentage change in income. In this case, we are given that when income rises by 100%, consumption of good x falls by 1%. This can be written as:

Percentage change in demand = -1%
Percentage change in income = 100%

So, income elasticity of demand for good x can be calculated as:

Income elasticity = (-1%/100%) = -0.01

Therefore, the correct answer is B.

Question 2

Suppose the consumer's income elasticity for good $x$ is -0.10 when monthly income is $1,000, and the consumer's income elasticity for good $x$ is 0.10 when monthly income is $2,000. From this information we can infer that

Accepted Answer

Income elasticity of demand measures how the quantity demanded of a good changes as consumer income changes. A positive income elasticity indicates that as income increases, demand for the good increases, classifying it as a normal good. A negative income elasticity indicates that as income increases, demand for the good decreases, classifying it as an inferior good. In this case, when income is low ($1,000), the income elasticity is negative (-0.10), indicating that good $x$ is an inferior good. When income is higher ($2,000), the income elasticity is positive (0.10), indicating that good $x$ is a normal good for high levels of income.

Question 3

Suppose when the consumer's income rises by 100%, the consumer's consumption of good $x$ only increases by 1%. We can infer that the consumer's income elasticity for good $x$ is:

Accepted Answer

Income elasticity of demand = % change in quantity demanded / % change in income
Given that when income rises by 100%, consumption of good x increases by only 1%, we can calculate the income elasticity as follows:
Income elasticity = (1%/100%) = 0.01
Therefore, the answer is C. The formula for income elasticity of demand is % change in quantity demanded / % change in income. Here, we are given that the % change in income is 100% and the % change in quantity demanded is only 1%. Thus, the income elasticity of demand is 1%/100% or 0.01. Since the answer choices are given in absolute values, the correct answer is C.

Question 4

A negatively-sloped Engel curve implies a(n):

Accepted Answer

A negatively-sloped Engel curve indicates an inverse relationship between income and quantity demanded. This implies that as income decreases, the quantity demanded of the good increases. This is a characteristic of an inferior good, as opposed to a normal or luxury good. A Giffen good is a specific type of inferior good that has a unique relationship with price that is different from other inferior goods. A marginal good is not a recognized economic term. A negatively-sloped Engel curve represents an inferior good, which means that as income increases, the quantity demanded of the good decreases. This is in contrast to a normal good where the quantity demanded increases as income increases. A Giffen good is a rare type of inferior good where the demand increases as the price increases, which is not necessarily related to income. "Marginal good" is not a recognized term in economics.

Question 5

In order to identify a consumer's demand curve from an optimal choice diagram we:

Accepted Answer

To identify a consumer's demand curve, we need to change the price of one good (independent variable) while holding the price of the other good and the consumer's income constant. This will allow us to observe how the consumer adjusts their consumption of the two goods in response to the price change, and we can identify the optimal basket of goods chosen by the consumer at each price level. By plotting these baskets on a graph, we can construct the consumer's demand curve for the good whose price has changed. To identify the consumer's demand curve, we need to change the price of one good while holding the price of the other good constant. Then, we need to identify the optimal consumption basket at each price level. This will give us the consumer's demand for that particular good at each price level, which can be used to plot the demand curve. Changing the income level or both prices at the same time will not give us the same level of information about the consumer's demand for a particular good at different price levels.

Question 6

If a consumer's preferences for two goods, say food and clothing, are such that as income decreases, consumption of food increases but consumption of clothing decreases, we can say that:

Accepted Answer

In this scenario, as income decreases, consumption of food increases. This indicates that food is an inferior good. On the other hand, as income decreases, consumption of clothing decreases, which implies that clothing is a normal good. Hence, the correct option is C - food is an inferior good and clothing is a normal good. This pattern of increasing consumption of an inferior good (food) and decreasing consumption of a normal good (clothing) with decreasing income indicates that food is an inferior good and clothing is a normal good. This is because as income decreases, consumers are forced to shift their consumption towards lower-priced goods, and for food, this means consuming more of the cheaper options. Conversely, for clothing, consumers may switch to cheaper options, but they also may cut back on the quantity or frequency of purchasing clothing altogether, indicating a decrease in demand for clothing as income decreases.

Question 7

An Engel curve for good $x$ describes:

Accepted Answer

An Engel curve shows how the consumption of a good varies as the consumer's income changes. It is a graphical representation of the income elasticity of demand for the good. Engel curve shows the relationship between quantity demanded of a good and consumer's income. Therefore, option B is the correct answer. Option A describes the price consumption curve, option C describes cross-price elasticity, and option D is not a relevant concept.

Question 8

As the price of a good whose units are measured along the x-axis increases, holding the consumer's income and the price of the other good constant, the budget line will:

Accepted Answer

When the price of a good increases, holding income and the price of the other good constant, the budget line rotates inward such that the y-intercept (representing the quantity of the other good) remains the same, but the x-intercept (representing the quantity of the good whose price has increased) shifts toward the origin. This reflects the decreased purchasing power for that good.

Question 9

The consumer's demand curve can be obtained analytically by solving which two equations?

Accepted Answer

The consumer's demand curve can be derived by solving the equation of the marginal rate of substitution ($M U _ { x } / M U _ { y } = P _ { x } / P _ { y }$) which equates the ratio of marginal utilities to the ratio of prices, and the budget constraint ($P _ { x } X + P _ { y } Y = I$), which represents the consumer's income allocation between two goods.

Question 10

A graph that plots the consumer's level of consumption of a good against the consumer's income is called a(n):

Accepted Answer

The graph described in the question is known as an Engel curve. It shows the relationship between a consumer's income and their level of consumption of a specific good. The curve is named after economist Ernst Engel who first described the relationship in the mid-19th century. A price-consumption curve shows the relationship between the price of a good and the quantity demanded, a demand curve shows the relationship between the price of a good and the quantity demanded by all consumers in the market, and a good-consumption curve is not a commonly used term in economics. A graph that plots the consumer's level of consumption of a good against the consumer's income is called an Engel curve. It shows how changes in income affect the quantity demanded of a particular good or service at a constant price level. It can help to identify whether a good is normal or inferior, depending on the slope of the curve. A normal good will have a positive slope, while an inferior good will have a negative slope.

Question 11

Suppose the consumer's utility function is given by $U ( x , y ) = \sqrt { x y }$ where $M U _ { x } = \frac { \sqrt { y } } { 2 \sqrt { x } } \quad M U _ { y } = \frac { \sqrt { x } } { 2 \sqrt { y } }$ The equation for this consumer's demand curve for $x$ is:

Accepted Answer

To find the demand curve for good x, we need to find the marginal rate of substitution (MRS).

$$MRS = \frac{MU_x}{MU_y} = \frac{\frac{\sqrt{y}}{2\sqrt{x}}}{\frac{\sqrt{x}}{2\sqrt{y}}} = 1$$

Setting the MRS equal to the price ratio, we get:

$$\frac{P_x}{P_y} = 1$$
$$P_x = P_y$$

Now we can substitute $P_y$ in terms of $x$ and $I$.

$$P_y = \frac{I - P_x x}{P_y}$$
$$P_y^2 = I - P_x x$$
$$x = \frac{I}{P_x^2} - \frac{1}{P_x} (\frac{P_y}{P_x})^2$$
$$x = \frac{I}{P_x^2} - \frac{1}{P_x}$$

Substituting with $P_x = \frac{I}{2x}$, we get:

$$x = \frac{I}{2P_x} - \frac{1}{P_x}$$
$$x = \frac{I}{2P_x} - \frac{1}{\frac{I}{2x}}$$
$$x = \frac{I}{2P_x} - \frac{2x}{I}$$
$$x = \frac{I^2}{4xP_x} - \frac{2x^2}{I^2}$$
$$x = \frac{I}{4P_x}$$

Therefore, the demand curve for good x is $x = \frac{I}{4P_x}$. Since the utility function is given as $\sqrt{xy}$, we can use the marginal utility functions to find the consumer's demand curve for good x.

$\frac{MU_x}{P_x}=\frac{\sqrt{y}}{2\sqrt{x}P_x}$

Solving for x, we get:

$x=\frac{1}{4}\cdot\frac{y}{P_x^2}$

Now, using the budget constraint:

$I=P_xx+P_yy$

Substituting the value of x in terms of y from the demand curve:

$I=P_x\cdot\frac{1}{4}\cdot\frac{y}{P_x^2}+P_yy$

Simplifying and solving for y, we get:

$y=\frac{4I}{P_y}(P_y-P_x)$

Substituting the value of y in terms of x from the demand curve:

$y=\frac{4I}{P_y}\cdot\frac{P_x^2}{y}\cdot(P_y-P_x)$

Simplifying and solving for x, we get:

$x=\frac{I}{2P_x}$

Thus, the consumer's demand curve for good x is given by:

$x=\frac{I}{2P_x}$

Question 12

Suppose the consumer's utility function is given by $\mathrm { U } ( \mathrm { x } , \mathrm { y } ) = \mathrm { x } ^ { 1 / 4 } \mathrm { y } ^ { 3 / 4 }$ where $M U _ { x } = \frac { y ^ { \frac { 8 } { 4 } } } { 4 x ^ { \frac { 8 } { 4 } } } \quad M U _ { y } = \frac { 3 x ^ { \frac { 2 } { 4 } } } { 4 y ^ { \frac { 1 } { 4 } } }$
The equation for this consumer's demand curve for $x$ is:

Accepted Answer

To find the demand curve for $x$, we use the utility maximization condition that equates the marginal utility per dollar spent on each good, i.e., $\frac{MU_x}{P_x} = \frac{MU_y}{P_y}$. Given $MU_x = \frac{y^2}{4x^3}$ and $MU_y = \frac{3x^{1/2}}{4y^{1/4}}$, we solve for $x$ in terms of income $I$ and prices $P_x$ and $P_y$, considering the budget constraint $I = P_x x + P_y y$. The correct derivation involves using these conditions to find the relationship between $x$, $I$, and $P_x$, leading to the conclusion that $x = \frac{I}{4P_x}$, which is choice B.

Question 13

On a typical optimal choice diagram, with budget lines and indifference curves, the line that connects the consumer's optimal baskets as the price of one good changes holding income and the price of the other good constant is called the consumer's:

Accepted Answer

The line that connects the consumer's optimal baskets as the price of one good changes holding income and the price of the other good constant is called the price-consumption curve. It shows the effect of a change in the price of one good on the consumer's optimal consumption bundle. It allows us to see how the quantity demanded of one good changes as its price changes. The line that connects the consumer's optimal baskets as the price of one good changes holding income and the price of the other good constant is called the price-consumption curve. This curve shows how the quantity demanded of one good changes in response to a change in its price while keeping the other prices constant. It is also known as the demand curve for a single good or a commodity. The price-consumption curve is useful in determining the consumer's preferences and behavior in response to changes in prices. Therefore, the correct answer is B, the price-consumption curve.

Question 14

If a consumer's preferences for two goods, say food and clothing, are such that as income increases, consumption of food and clothing both increase, we can say that:

Accepted Answer

If consumption of both goods increases as income increases, both goods are classified as normal goods. If both goods increase as income increases, it indicates that both goods are normal goods.

Question 15

The type of elasticity of demand that is most commonly positively valued but that can be negative at times is called:

Accepted Answer

Income elasticity of demand is typically positive because as income increases, people generally have more money to spend and therefore demand more goods and services. However, in the case of inferior goods, as income increases, people may switch to higher-quality substitutes and demand for the inferior good may actually decrease, resulting in a negative income elasticity of demand. The type of elasticity of demand that is most commonly positively valued is income elasticity of demand, which measures the responsiveness of quantity demanded to changes in income. This elasticity is usually positive because as income increases, people tend to buy more of most goods. However, it can be negative in the case of inferior goods, which are goods for which demand decreases as income increases.

Question 16

On a typical optimal choice diagram, with budget lines and indifference curves, the line that connects the consumer's optimal baskets as the consumer's income changes holding the prices of the goods constant is called the consumer's:

Accepted Answer

The line that connects the consumer's optimal baskets as the consumer's income changes holding the prices of the goods constant is known as the income-consumption curve. It shows the various combinations of goods the consumer can purchase at different levels of income while remaining indifferent between them. The income-consumption curve shows the relationship between a consumer's income and the optimal basket of goods they would purchase at each income level, holding the prices of the goods constant. This curve is important for understanding how changes in income affect a consumer's purchasing behavior and helps to identify the consumer's income elasticity of demand for each good. Therefore, option A is the correct answer.

Question 17

Suppose when the consumer's income rises by 100%, the consumer's consumption of good $x$ only increases 1%. We can infer that good $x$ is a(n):

Accepted Answer

Good $x$ is a normal good because the consumer's consumption of it increases as their income increases, even if the increase in consumption is very small. This is the defining characteristic of a normal good.

Question 18

Suppose when the consumer's income rises by 100%, the consumer's consumption of good $x$ falls by 1%. We can infer that good $x$ is a(n):

Accepted Answer

This situation indicates that good x is an inferior good, as the consumer is buying less of it as their income increases. This is in contrast to normal goods, where consumption usually increases as income rises. Giffen goods, which are rare, are goods where the demand increases as the price increases. Marginal goods refers to the additional satisfaction from consuming one additional unit of a good, and is unrelated to this scenario. When the income of the consumer rises and the consumption of the good falls, we can infer that the good is an inferior good. This is in contrast to a normal good, where the consumption of the good increases as the consumer's income rises. A Giffen good is a special type of inferior good where the demand for the good increases as the price of the good increases, which is not the case here. A marginal good is not a commonly used economic term, so it is not a relevant choice.

Question 19

A curve that represents the consumer's "willingness to pay" is the consumer's:

Accepted Answer

The demand curve represents the quantity of a good or service that consumers are willing to buy at different price points, and therefore reflects their willingness to pay. The exchange curve and supply curve are not directly related to the concept of willingness to pay. The demand curve represents the quantity of a product that consumers are willing and able to purchase at different prices. It reflects the consumer's willingness to pay for a particular product at various price points. Therefore, the correct answer is B, the demand curve.

Question 20

Which of the following is held constant along an income-consumption curve?

Accepted Answer

The income-consumption curve shows how a consumer's optimal bundle of goods changes as their income changes, holding the prices of all goods constant.

Quiz 5: The Theory of Demand

Suppose when the consumer's income rises by 100%, the consumer's consumption of good $x$ falls by 1%. We can infer that the consumer's income elasticity for good $x$ is:

Suppose the consumer's income elasticity for good $x$ is -0.10 when monthly income is $1,000, and the consumer's income elasticity for good $x$ is 0.10 when monthly income is $2,000. From this information we can infer that

Suppose when the consumer's income rises by 100%, the consumer's consumption of good $x$ only increases by 1%. We can infer that the consumer's income elasticity for good $x$ is:

A negatively-sloped Engel curve implies a(n) :

In order to identify a consumer's demand curve from an optimal choice diagram we:

If a consumer's preferences for two goods, say food and clothing, are such that as income decreases, consumption of food increases but consumption of clothing decreases, we can say that:

An Engel curve for good $x$ describes:

As the price of a good whose units are measured along the x-axis increases, holding the consumer's income and the price of the other good constant, the budget line will:

The consumer's demand curve can be obtained analytically by solving which two equations?

A graph that plots the consumer's level of consumption of a good against the consumer's income is called a(n) :

Suppose the consumer's utility function is given by $U ( x , y ) = \sqrt { x y }$ where $M U _ { x } = \frac { \sqrt { y } } { 2 \sqrt { x } } \quad M U _ { y } = \frac { \sqrt { x } } { 2 \sqrt { y } }$ The equation for this consumer's demand curve for $x$ is:

On a typical optimal choice diagram, with budget lines and indifference curves, the line that connects the consumer's optimal baskets as the price of one good changes holding income and the price of the other good constant is called the consumer's:

If a consumer's preferences for two goods, say food and clothing, are such that as income increases, consumption of food and clothing both increase, we can say that:

The type of elasticity of demand that is most commonly positively valued but that can be negative at times is called:

On a typical optimal choice diagram, with budget lines and indifference curves, the line that connects the consumer's optimal baskets as the consumer's income changes holding the prices of the goods constant is called the consumer's:

Suppose when the consumer's income rises by 100%, the consumer's consumption of good $x$ only increases 1%. We can infer that good $x$ is a(n) :

Suppose when the consumer's income rises by 100%, the consumer's consumption of good $x$ falls by 1%. We can infer that good $x$ is a(n) :

A curve that represents the consumer's "willingness to pay" is the consumer's:

Which of the following is held constant along an income-consumption curve?

Quiz 5: The Theory of Demand

Suppose when the consumer's income rises by 100%, the consumer's consumption of good xxx falls by 1%. We can infer that the consumer's income elasticity for good xxx is:

Suppose the consumer's income elasticity for good xxx is -0.10 when monthly income is $1,000, and the consumer's income elasticity for good xxx is 0.10 when monthly income is $2,000. From this information we can infer that

Suppose when the consumer's income rises by 100%, the consumer's consumption of good xxx only increases by 1%. We can infer that the consumer's income elasticity for good xxx is:

A negatively-sloped Engel curve implies a(n) :

In order to identify a consumer's demand curve from an optimal choice diagram we:

If a consumer's preferences for two goods, say food and clothing, are such that as income decreases, consumption of food increases but consumption of clothing decreases, we can say that:

An Engel curve for good xxx describes:

As the price of a good whose units are measured along the x-axis increases, holding the consumer's income and the price of the other good constant, the budget line will:

The consumer's demand curve can be obtained analytically by solving which two equations?

A graph that plots the consumer's level of consumption of a good against the consumer's income is called a(n) :

On a typical optimal choice diagram, with budget lines and indifference curves, the line that connects the consumer's optimal baskets as the price of one good changes holding income and the price of the other good constant is called the consumer's:

If a consumer's preferences for two goods, say food and clothing, are such that as income increases, consumption of food and clothing both increase, we can say that:

The type of elasticity of demand that is most commonly positively valued but that can be negative at times is called:

On a typical optimal choice diagram, with budget lines and indifference curves, the line that connects the consumer's optimal baskets as the consumer's income changes holding the prices of the goods constant is called the consumer's:

Suppose when the consumer's income rises by 100%, the consumer's consumption of good xxx only increases 1%. We can infer that good xxx is a(n) :

Suppose when the consumer's income rises by 100%, the consumer's consumption of good xxx falls by 1%. We can infer that good xxx is a(n) :

A curve that represents the consumer's "willingness to pay" is the consumer's:

Which of the following is held constant along an income-consumption curve?

Suppose when the consumer's income rises by 100%, the consumer's consumption of good $x$ falls by 1%. We can infer that the consumer's income elasticity for good $x$ is:

Suppose the consumer's income elasticity for good $x$ is -0.10 when monthly income is $1,000, and the consumer's income elasticity for good $x$ is 0.10 when monthly income is $2,000. From this information we can infer that

Suppose when the consumer's income rises by 100%, the consumer's consumption of good $x$ only increases by 1%. We can infer that the consumer's income elasticity for good $x$ is:

An Engel curve for good $x$ describes:

Suppose when the consumer's income rises by 100%, the consumer's consumption of good $x$ only increases 1%. We can infer that good $x$ is a(n) :

Suppose when the consumer's income rises by 100%, the consumer's consumption of good $x$ falls by 1%. We can infer that good $x$ is a(n) :