Question 1

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

First,derive the demand equation using the budget constraint and the fact that T=C.Then
T = I/(pt + pc)
Using calculus,
∂T/∂I = -I/(pt + pc)²
The income elasticity is:
ζT = -I/(pt + pc)² × (I/T)= -1

Question 2

Suppose Lisa spends all of her money on books and bagels,and a bagel is an inferior good for her.When the price of coffee increases,the

Accepted Answer

A)  consumption of coffee will fall. 
B)  consumption of coffee will rise. 
C)  consumption of coffee will not change. 
D)  Not enough information. 
A)  consumption of coffee will fall. 
B)  consumption of coffee will rise. 
C)  consumption of coffee will not change. 
D)  Not enough information. B

Question 3

For the following, please answer "True" or "False" and explain why.
-If a consumer is compensated for the income effect that occurs when the price of a good increases,then his demand curves can never slope upward.

Accepted Answer

A) True 
 B)False  True

Question 4

Suppose Lisa spends all of her money on books and coffee.When the price of coffee decreases,the

Accepted Answer

A)  substitution effect on coffee is positive, and the income effect on coffee is positive. 
B)  substitution effect on coffee is ambiguous, and the income effect on coffee is ambiguous. 
C)  substitution effect on coffee is positive, and the income effect on coffee is ambiguous. 
D)  substitution effect on coffee is ambiguous, and the income effect on coffee is positive. 
A)  substitution effect on coffee is positive, and the income effect on coffee is positive. 
B)  substitution effect on coffee is ambiguous, and the income effect on coffee is ambiguous. 
C)  substitution effect on coffee is positive, and the income effect on coffee is ambiguous. 
D)  substitution effect on coffee is ambiguous, and the income effect on coffee is positive.

Question 5

Andrew's union has signed a new wage contract for the coming year.It promises to increase Andrew's wages in the next year so that he can keep on consuming the same bundle of goods when the prices go up.Should Andrew anticipate being happier this year (before prices rise)or next year (after prices rise)? Use a graph to demonstrate how you can tell this.Be clear!

Accepted Answer

If prices all rise by the same percentag

Question 6

-The above figure shows Bobby's indifference map for juice and snacks.Also shown are three budget lines resulting from different prices for snacks.As the price of snacks rises,Bobby's utility

Accepted Answer

A)  stays the same. 
B)  increases. 
C)  decreases. 
D)  might change, but there is not enough information to determine. 
A)  stays the same. 
B)  increases. 
C)  decreases. 
D)  might change, but there is not enough information to determine.

Question 7

If the income elasticity of potatoes is -0.7,then the income effect caused by a price decrease of potatoes

Accepted Answer

A)  tends to increase the consumption of potatoes. 
B)  tends to decrease the consumption of potatoes. 
C)  is less than the substitution effect. 
D)  None of the above. 
A)  tends to increase the consumption of potatoes. 
B)  tends to decrease the consumption of potatoes. 
C)  is less than the substitution effect. 
D)  None of the above.

Question 8

A consumer purchases housing (H)and spends the remainder of income on the composite good (C).The government is considering one of two policies.Policy A taxes housing by $50 per unit consumed.With the tax in place,the consumer purchases 100 units of housing.Policy B collects a lump-sum tax of $5,000 from the consumer's income.Compare the effects of the policies on the consumer's utility/well-being and the amount of housing and composite goods purchased.

Accepted Answer

The lump-sum policy will allow him to re

Question 9

For the following, please answer "True" or "False" and explain why.
-The compensated demand curve only responds to the income effect from a price change.

Accepted Answer

A) True 
 B)False

Question 10

When measuring the substitution effect,one uses the change along

Accepted Answer

A)  the old indifference curve. 
B)  the new indifference curve. 
C)  either the old or the new indifference curve. 
D)  the budget constraint. 
A)  the old indifference curve. 
B)  the new indifference curve. 
C)  either the old or the new indifference curve. 
D)  the budget constraint.

Question 11

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

Accepted Answer

The weighted income elasticiti

Question 12

-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

A)  Graph A 
B)  Graph B 
C)  Graph C 
D)  Graph D 
A)  Graph A 
B)  Graph B 
C)  Graph C 
D)  Graph D

Question 13

Dorothy lives in a city with high air pollution.Pollution is a bad,but she is able to avoid air pollution by wearing a face mask.Her preferences are given by
U(q₁,q₂)= (q₁ - P)²q₂²
where q₁ is the amount of time she spends wearing a mask,P is the amount of pollution and q₂ is a composite of other goods (p₂ = 1).Dorothy must decide how much to wear a mask and how much q₂ to purchase.The price of masks is pM.Assume q₁* > P when answering this question.
a.Derive Dorothy's demand for masks,q₁*(p₁,Y,P)
b.How does the quantity of pollution affect the demand for masks? That is,find q₁*/P.
c.How does her income influence the quantity of masks she purchases? That is,find q₁*/Y.
d.What condition must hold for the assumption q₁* > P to hold?

Accepted Answer

a.q₁* = (Y+p₁P)/2p₁
b.dq₁*/dP

Question 14

Recall that the Cobb-Douglas Utility function U(X,Y)= XᵃY¹⁻ᵃ has the unusual property that the demand for each good depends only on its own price.Therefore,a consumer will always allocate the same proportion of income to each good.Specifically,the demand for X is
X* = aI/pₓ
where I is income and pₓ is the price of X.
a.What is the price elasticity of demand for X?
b.What is the direction of the income effect on X of an increase in pₓ?

Accepted Answer

a.Using calculus,
∂X/∂pₓ = -aI/pₓ²
Then

Question 15

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

A)  1.25 
B)  .75 
C)  1 
D)  unknown with the information provided 
A)  1.25 
B)  .75 
C)  1 
D)  unknown with the information provided

Question 16

Under which of the following conditions will there be no substitution bias in the CPI?

Accepted Answer

A)  Lower-priced goods increase in price by a greater percentage than do higher-priced goods. 
B)  Higher-price goods increase in price by a greater percentage than do lower-priced goods. 
C)  All goods change in price by the same amount. 
D)  All goods change in price by the same percentage. 
A)  Lower-priced goods increase in price by a greater percentage than do higher-priced goods. 
B)  Higher-price goods increase in price by a greater percentage than do lower-priced goods. 
C)  All goods change in price by the same amount. 
D)  All goods change in price by the same percentage.

Question 17

Darwin's preferences are given by U(q₁,q₂)= q₁.⁵ + q₂.Derive the demand equations for q₁ and q₂.Assume prices and income are such that both goods are consumed in strictly positive quantities.

Accepted Answer

Using the substitution method,
Max q₁.⁵

Question 18

To separate the income and substitute effects,the imaginary budget line should be

Accepted Answer

A)  tangent to the new indifference curve and parallel to the new budget line. 
B)  tangent to the new indifference curve and parallel to the old budget line. 
C)  tangent to the old indifference curve and parallel to the new budget line. 
D)  tangent to the old indifference curve and parallel to the old budget line. 
A)  tangent to the new indifference curve and parallel to the new budget line. 
B)  tangent to the new indifference curve and parallel to the old budget line. 
C)  tangent to the old indifference curve and parallel to the new budget line. 
D)  tangent to the old indifference curve and parallel to the old budget line.

Question 19

-The above figure shows Bobby's indifference map for juice and snacks.Also shown are three budget lines resulting from different prices for snacks assuming he has $20 to spend on these goods.Which of the following points are on Bobby's price-consumption curve?

Accepted Answer

A)  10 snacks and 20 juices 
B)  10 snacks and 0 juices 
C)  10 snacks and 5 juices 
D)  10 snacks and 15 juices 
A)  10 snacks and 20 juices 
B)  10 snacks and 0 juices 
C)  10 snacks and 5 juices 
D)  10 snacks and 15 juices

Question 20

In the case of a normal good,

Accepted Answer

A)  demand curves always slope downward. 
B)  the income effect and substitution effect are in the same direction. 
C)  the Engel curve slopes upward. 
D)  All of the above. 
A)  demand curves always slope downward. 
B)  the income effect and substitution effect are in the same direction. 
C)  the Engel curve slopes upward. 
D)  All of the above.

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

Suppose Lisa spends all of her money on books and bagels,and a bagel is an inferior good for her.When the price of coffee increases,the

For the following, please answer "True" or "False" and explain why. -If a consumer is compensated for the income effect that occurs when the price of a good increases,then his demand curves can never slope upward.

Suppose Lisa spends all of her money on books and coffee.When the price of coffee decreases,the

-The above figure shows Bobby's indifference map for juice and snacks.Also shown are three budget lines resulting from different prices for snacks.As the price of snacks rises,Bobby's utility

If the income elasticity of potatoes is -0.7,then the income effect caused by a price decrease of potatoes

For the following, please answer "True" or "False" and explain why. -The compensated demand curve only responds to the income effect from a price change.

When measuring the substitution effect,one uses the change along

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

-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?

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?

Under which of the following conditions will there be no substitution bias in the CPI?

Darwin's preferences are given by U(q₁,q₂)= q₁.⁵ + q₂.Derive the demand equations for q₁ and q₂.Assume prices and income are such that both goods are consumed in strictly positive quantities.

To separate the income and substitute effects,the imaginary budget line should be

-The above figure shows Bobby's indifference map for juice and snacks.Also shown are three budget lines resulting from different prices for snacks assuming he has $20 to spend on these goods.Which of the following points are on Bobby's price-consumption curve?

In the case of a normal good,

Introduction

Supply and Demand

A Consumers Constrained Choice

Consumer Welfare and Policy Analysis

Firms and Production

Costs

Competitive Firms and Markets

Properties and Applications of the Competitive Model

General Equilibrium and Economic Welfare

Monopoly and Monopsony

Pricing and Advertising

Game Theory

Oligopoly and Monopolistic Competition

Factor Markets

Uncertainty

Property Rights, externalities, rivalry, and Exclusion

Asymmetric Information

Contracts and Moral Hazards

Filters

Exam 4: Demand

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

Suppose Lisa spends all of her money on books and bagels,and a bagel is an inferior good for her.When the price of coffee increases,the

For the following, please answer "True" or "False" and explain why. -If a consumer is compensated for the income effect that occurs when the price of a good increases,then his demand curves can never slope upward.

Suppose Lisa spends all of her money on books and coffee.When the price of coffee decreases,the

-The above figure shows Bobby's indifference map for juice and snacks.Also shown are three budget lines resulting from different prices for snacks.As the price of snacks rises,Bobby's utility

If the income elasticity of potatoes is -0.7,then the income effect caused by a price decrease of potatoes

For the following, please answer "True" or "False" and explain why. -The compensated demand curve only responds to the income effect from a price change.

When measuring the substitution effect,one uses the change along

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

-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?

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?

Under which of the following conditions will there be no substitution bias in the CPI?

Darwin's preferences are given by U(q₁,q₂)= q₁.⁵ + q₂.Derive the demand equations for q₁ and q₂.Assume prices and income are such that both goods are consumed in strictly positive quantities.

To separate the income and substitute effects,the imaginary budget line should be

-The above figure shows Bobby's indifference map for juice and snacks.Also shown are three budget lines resulting from different prices for snacks assuming he has $20 to spend on these goods.Which of the following points are on Bobby's price-consumption curve?

In the case of a normal good,

Introduction

Supply and Demand

A Consumers Constrained Choice

Consumer Welfare and Policy Analysis

Firms and Production

Costs

Competitive Firms and Markets

Properties and Applications of the Competitive Model

General Equilibrium and Economic Welfare

Monopoly and Monopsony

Pricing and Advertising

Game Theory

Oligopoly and Monopolistic Competition

Factor Markets

Uncertainty

Property Rights, externalities, rivalry, and Exclusion

Asymmetric Information

Contracts and Moral Hazards

Filters