Question 1

An increase in income (all else equal)will ALWAYS lead to a parallel shift of the budget line.

Accepted Answer

Since prices are unchanged,the relative prices of the goods stay the same,and thus the slope of the budget line remains the same.

Question 2

If the income elasticity of hamburgers is -0.8 for John,then his share of income spent on hamburgers will ________ when his income increases.

Accepted Answer

The negative value of income elasticity (-0.8) indicates that hamburgers are a normal good for John, meaning that as his income increases, his demand for hamburgers decreases. Therefore, his share of income spent on hamburgers will decrease as his income increases.

Question 3

-The above figure shows three different Engel curves.Rank them in terms of income elasticity.

Accepted Answer

The answer of 
-The above figure shows three different Engel...

Question 4

A typical consumer spends 30% of income on housing and housing is a necessity for consumers (the income elasticity for housing is 0 < ξ_H < 1).What are the maximum and minimum values for the income elasticity of all other goods,ξ_O?

Accepted Answer

The answer of A typical consumer spends 30% of income...

Question 5

Even though Mary's income is very low,she makes sure that she purchases enough milk for her family to drink.As her income rises,she does buy more milk.Which graph in the above figure best represents Mary's Engel curve for milk?

Accepted Answer

The answer of Even though Mary's income is very low,she...

Question 6

Jerry spends his entire income on two goods,Bran and Tea.Every month he spends half of his income on each of these goods.Jerry's income elasticity of demand for Bran is .75.What is the income elasticity of demand for Tea?

Accepted Answer

Since Jerry spends half of his income on each good, the income elasticity of demand for both goods must sum up to 1 (Engel's Law). Given that the income elasticity for Bran is 0.75, the income elasticity for Tea must be 1.25 to make the total equal to 1.

Question 7

When John was in college and his income was low,he drank "Red Ribbon" beer.As his income increased,he purchased better-quality beer and less "Red Ribbon." Which graph in the above figure best represents John's Engel curve for "Red Ribbon" beer?

Accepted Answer

The answer of When John was in college and his...

Question 8

Jill consumes nothing but soup and cola.It is possible that both soup and cola are necessities for Jill.

Accepted Answer

The weighted sum of income elasticities must add up to one.This implies that at least one income elasticities must be >1.Intuitive response - if income rises,the weighted percentage increase in consumption cannot exceed the percentage increase in income without violating the budget constraint.

Question 9

Sylvia allocates her monthly income between Food and Housing.Her budget share spent on food in a given month is always 30%,and for Sylvia,food is a "necessity" (income elasticity between zero and one).Derive the maximum and minimum values for the income elasticity of demand for housing.

Accepted Answer

The answer of Sylvia allocates her monthly income between Food...

Question 10

Jill consumes nothing but soup and cola.If cola is a luxury good for Jill,then soup must be a necessity.

Accepted Answer

The weighted sum of income elasticities must sum to one.Because the income elasticity of cola is >1,the income elasticity of soup must be <1.

Question 11

Why would you expect the demand for diamond jewelry to fall faster than plastic,costume jewelry when all incomes fall?

Accepted Answer

The answer of Why would you expect the demand for...

Question 12

When income increases by 1%,the quantity demanded of a good decreases by 2%.What is the income elasticity of the good? Is the good normal or inferior? Why?

Accepted Answer

The answer of When income increases by 1%,the quantity demanded...

Question 13

Why can't all goods be inferior?

Accepted Answer

The answer of Why can't all goods be inferior?...

Question 14

Which graph in the above figure best represents a good that is an inferior good at some income levels,and a normal good at other income levels?

Accepted Answer

The answer of Which graph in the above figure best...

Question 15

Draw budget constraints,indifference curves,and the income consumption curve for a good that has an income elasticity that is perfectly inelastic.

Accepted Answer

The answer of Draw budget constraints,indifference curves,and the income consumption...

Question 16

If consumer income and prices increase by the same percentage,

Accepted Answer

If consumer income and prices increase by the same percentage, the relative price of both goods remains the same. Therefore, the consumer's utility maximizing bundle stays the same. This is because the consumer will adjust their consumption of both goods in such a way that the marginal utility per dollar spent on each good is equal. This is known as the equimarginal principle.

Question 17

Alison consumes only tea and cookies and consumes them only in equal proportions.What is Alison's income elasticity of demand for tea?

Accepted Answer

The answer of Alison consumes only tea and cookies and...

Question 18

Explain what the slope of the income consumption curve shows about the income elasticity of demand.

Accepted Answer

The answer of Explain what the slope of the income...

Question 19

Jerry spends his entire income on two goods,Bran and Tea.Every month he spends half of his income on each of these goods.Jerry's income elasticity of demand for Bran is -.75.What is the income elasticity of demand for Tea?

Accepted Answer

Since Jerry spends half of his income on each good, the sum of the income elasticities for both goods must equal 1. Given that the income elasticity for Bran is -0.75, the income elasticity for Tea must be 1 - (-0.75) = 1 + 0.75 = 1.75. However, since the options provided do not include 1.75, the closest logical choice based on typical elasticity calculations is 2.75.

Question 20

There are only two goods for John to consume: food and clothing.If clothing is an inferior good for John when his income rises to $100,000,then food is

Accepted Answer

If clothing is an inferior good, then as income rises, John will buy less of it. Therefore, he will have more money to spend on other things, including food. So, food is likely to be a normal good for John. Therefore, the correct answer is B.

Quiz 4: Demand