Question 1

A change in the price of one good cannot leave utility unchanged unless the price change is accompanies by a change in income.

Accepted Answer

A) True 
 B)False  False

Question 2

All quasilinear goods are necessities.

Accepted Answer

A) True 
 B)False  True

Question 3

The price of peaches goes up and I observe you buying more strawberries.This implies strawberries must be a normal good.

Accepted Answer

A) True 
 B)False  False

Question 4

Currently.the price of consuming housing   is lowered by the fact that home mortgage interest is tax deductible.Suppose the government proposed to eliminate this implicit subsidy of your housing consumption, raising the price from   to   .At the same time, the government lowers the tax on other consumption, lowering the price from   to   . 
a.Write down your original budget constraint assuming the consumer has income I.
b.Suppose the utility function   captures your tastes, and suppose   ,   ,   ,   and   .Write out the utility maximization problem for this consumer prior to any policy change. 
c.How much housing and other goods will this consumer consume prior to any policy change?
d.How much would this consumer be willing to pay to get the policy change implemented?

Accepted Answer

a. @#IMG-DLM& b. @#IMG-DLM& c. @#IMG-DLM& d. We first have to solve fo

Question 5

Suppose a relatively low income family has a monthly budget of $1,000 to allocate between food and a non-food composite good.In this problem, assume food is aggregated into a "composite food" good that is modeled on the horizontal axis, and the non-food composite good is denominated in "dollars of other consumption".The price of food is $10 per unit.Suppose further that this family's tastes exhibit kinks in indifference curves, with one such indifference curve graphed below.   
a.Draw the family's budget constraint and label the optimal consumption bundle.
b.Due to unexpected droughts, the price of food rises to $20.A cash subsidy S that leaves our family with the same level of happiness as it enjoyed prior to the price increase is proposed.How much would this subsidy cost for this family?
c.An alternative proposal suggests a price subsidy s that lowers the price of food for this family from $20 to ($20-s), with s set sufficiently high to allow the family to reach its original utility level.
d.Yet a third proposal suggests a price subsidy that leaves in tact the new price of $20 for the first 20 units of food bought by the family but then lowers the price for this family to $(20-s') while also making the family just as happy as it was before.How high does s' have to be to accomplish this?
e.If cost is all you care about, how would you rank these three policies? What if you care about food consumption for this family and believe a policy is better if it results in more food consumption?

Accepted Answer

a. The budget, illustrated below, is "ta

Question 6

Bottles of Coca-Cola and equally-sized bottles of Pepsi Cola are perfect substitutes for a consumer, but a bottle of Coke costs 10 cents less than bottles of Pepsi.The income effect of a 15 cent increase in the price of Pepsi will be for the consumer to drink less cola.

Accepted Answer

A) True 
 B)False

Question 7

Every Giffen good is a necessity but not every interior good is a necessity.

Accepted Answer

A) True 
 B)False

Question 8

The price of peaches goes up and I observe you buying fewer strawberries.Which of the following is consistent with this observation:

Accepted Answer

A) Strawberries are inferior and peaches are normal. 
B) Strawberries are normal and peaches are inferior. 
C) Both strawberries and peaches are inferior. 
D) Both (a) and (b). 
E) Both (a) and (c).
F)Both (b) and (c).
G)All of the above. 
A) Strawberries are inferior and peaches are normal. 
B) Strawberries are normal and peaches are inferior. 
C) Both strawberries and peaches are inferior. 
D) Both (a) and (b). 
E) Both (a) and (c).
F)Both (b) and (c).
G)All of the above.

Question 9

Every necessity is a normal good, but not all normal goods are necessities.

Accepted Answer

A) True 
 B)False

Question 10

Wholesale clubs charge a fixed monthly fee but then offer goods at discount prices.For purposes of this question, suppose a wholesale club and a supermarket offer the same composite grocery item, with the supermarket charging no fixed fee but a higher price for the item.(Assume no corner solutions.)

Accepted Answer

A) Anyone shopping at the wholesale club places less value on the marginal item bought than anyone shopping at the supermarket. 
B) Anyone indifferent between the two stores buys more (or at least no less) if she chooses the wholesale club. 
C) We cannot predict how much value different individuals place on the marginal item in each store because we cannot measure utility objectively. 
D) Both (a) and (b) are true. 
E) Both (b) and (c) are true. 
A) Anyone shopping at the wholesale club places less value on the marginal item bought than anyone shopping at the supermarket. 
B) Anyone indifferent between the two stores buys more (or at least no less) if she chooses the wholesale club. 
C) We cannot predict how much value different individuals place on the marginal item in each store because we cannot measure utility objectively. 
D) Both (a) and (b) are true. 
E) Both (b) and (c) are true.

Question 11

Homothetic goods are neither necessities nor luxuries, but rather lie on the borderline between them.​

Accepted Answer

A) True 
 B)False

Question 12

The price of peaches goes up and I observe you buying more strawberries.This implies that strawberries must be an inferior good.

Accepted Answer

A) True 
 B)False

Question 13

Income effects are negative for normal goods, and positive for inferior goods.

Accepted Answer

A) True 
 B)False

Question 14

The price of peaches goes up and I observe you buying fewer strawberries.This implies strawberries must be a normal good.

Accepted Answer

A) True 
 B)False

Question 15

Every luxury good is a normal good but not every normal good is a luxury.

Accepted Answer

A) True 
 B)False

Question 16

Suppose the government spends the same for a particular consumer under two different policies: One subsidizes the price of good x while the other is a lump sum subsidy.Which of the following is true.

Accepted Answer

A) Compared to the lump sum subsidy, the consumer will purchase more x under the price subsidy if and only if x is a normal good. 
B) Compared to the lump sum subsidy, the consumer will purchase less of x under the price subsidy if x is an inferior good. 
C) Compared to the lump sum subsidy, the consumer will purchase less of x under the price subsidy if x is a Giffen good. 
D) The consumer will spend the same on x under the two policy if and only if her indifference curves are kinked. 
E) Both (a) and (c).
F)Both (b) and (c).
G)All of the above.h.None of the above. 
A) Compared to the lump sum subsidy, the consumer will purchase more x under the price subsidy if and only if x is a normal good. 
B) Compared to the lump sum subsidy, the consumer will purchase less of x under the price subsidy if x is an inferior good. 
C) Compared to the lump sum subsidy, the consumer will purchase less of x under the price subsidy if x is a Giffen good. 
D) The consumer will spend the same on x under the two policy if and only if her indifference curves are kinked. 
E) Both (a) and (c).
F)Both (b) and (c).
G)All of the above.h.None of the above.

Question 17

Your drink budget is entirely split between bottled water and fancy liqueurs, and your tastes are quasilinear in bottled water.In an attempt to get people to drink more water, the government introduces a subsidy that lowers the price of bottled water.
a.In a graph with bottled water on the horizontal and fancy liqueurs on the vertical axis, illustrate your before-subsidy budget and your optimal bundle A.
b.As a result of the water subsidy, I notice you consume more fancy liqueur.Illustrate this in your graph using income and substitution effects.
c.You and I are good friends, in part because I confided in you some time ago that I, too, have tastes that are quasilinear in water.(Nothing bonds like quasilinearity!) But, after the subsidy is introduced, you observe that I, unlike you, have reduced my consumption of fancy liqueurs.Your other friends claim that this is proof that our friendship is based on a fiction --- that I cannot possibly also have quasilinear tastes.Illustrate in a graph why your friends are wrong.
d.If we both have quasilinear tastes, can you explain what the fundamental difference in our tastes is that accounts for the difference in behavior?

Accepted Answer

a. This is illustrated in the first grap

Question 18

Goods with small substitution effects tend to be normal goods.

Accepted Answer

A) True 
 B)False

Question 19

You and I both have homothetic tastes.When the price of peaches goes up, you buy more strawberries and I buy fewer.Which of the following must be true.

Accepted Answer

A) Peaches are more substitutable with strawberries for me than they are for you. 
B) Peaches are more substitutable with strawberries for you than they are for me. 
C) Strawberries are normal goods for you and inferior goods for me. 
D) Strawberries are normal goods for me and inferior goods for you. 
E) Both (a) and (c).
F)Both (b) and (c).
G)Both (a) and (d)
H)Both (b) and (d) 
A) Peaches are more substitutable with strawberries for me than they are for you. 
B) Peaches are more substitutable with strawberries for you than they are for me. 
C) Strawberries are normal goods for you and inferior goods for me. 
D) Strawberries are normal goods for me and inferior goods for you. 
E) Both (a) and (c).
F)Both (b) and (c).
G)Both (a) and (d)
H)Both (b) and (d)

Question 20

All homothetic goods are normal goods.

Accepted Answer

A) True 
 B)False

Exam 7: Income and Substitution Effects in Consumer Goods Markets

A change in the price of one good cannot leave utility unchanged unless the price change is accompanies by a change in income.

All quasilinear goods are necessities.

The price of peaches goes up and I observe you buying more strawberries.This implies strawberries must be a normal good.

Bottles of Coca-Cola and equally-sized bottles of Pepsi Cola are perfect substitutes for a consumer, but a bottle of Coke costs 10 cents less than bottles of Pepsi.The income effect of a 15 cent increase in the price of Pepsi will be for the consumer to drink less cola.

Every Giffen good is a necessity but not every interior good is a necessity.

The price of peaches goes up and I observe you buying fewer strawberries.Which of the following is consistent with this observation:

Every necessity is a normal good, but not all normal goods are necessities.

Homothetic goods are neither necessities nor luxuries, but rather lie on the borderline between them.​

The price of peaches goes up and I observe you buying more strawberries.This implies that strawberries must be an inferior good.

Income effects are negative for normal goods, and positive for inferior goods.

The price of peaches goes up and I observe you buying fewer strawberries.This implies strawberries must be a normal good.

Every luxury good is a normal good but not every normal good is a luxury.

Suppose the government spends the same for a particular consumer under two different policies: One subsidizes the price of good x while the other is a lump sum subsidy.Which of the following is true.

Goods with small substitution effects tend to be normal goods.

You and I both have homothetic tastes.When the price of peaches goes up, you buy more strawberries and I buy fewer.Which of the following must be true.

All homothetic goods are normal goods.

Introduction

A Consumers Economic Circumstances

Economic Circumstances in Labor and Financial Markets

Tastes and Indifference Curves

Different Types of Tastes

Doing the Best We Can

Wealth and Substitution Effects in Labor and Capital Markets

Demand for Goods and Supply of Labor and Capital

Consumer Surplus and Deadweight Loss

One Input and One Output: a Short-Run Producer Model

Production With Multiple Inputs

Production Decisions in the Short and Long Run

Competitive Market Equilibrium

The Invisible Hand and the First Welfare Theorem

General Equilibrium

Choice and Markets in the Presence of Risk

Elasticities, Price-Distorting Policies, and Non-Price Rationing

Distortionary Taxes and Subsidies

Prices and Distortions Across Markets

Externalities in Competitive Markets

Asymmetric Information in Competitive Markets

Monopoly

Strategic Thinking and Game Theory

Oligopoly

Product Differentiation and Innovation in Markets

Public Goods

Governments and Politics

What Is Good Challenges From Psychology and Philosophy

Filters

Homothetic goods are neither necessities nor luxuries, but rather lie on the borderline between them.