Question 1

Assuming the same sized substitution effect, normal goods have steeper cross-price demand curves than inferior goods.

Accepted Answer

A) True 
 B)False  True

Question 2

Consider a consumer who consumes only   and   .The price of   falls. 
a.On a graph with   on the horizontal and   on the vertical axis, illustrate the change in this consumer's budget constraint assuming exogenous income I. 
b.Illustrate income and substitution effects for   assuming that both goods are normal. 
c.Can you tell whether the cross-price demand curve for   is upward or downward sloping? 
d.Suppose   is leisure hours and   is a composite consumption good.Consider an increase in the wage assuming a fixed endowment of leisure (and no exogenous source of income).How is your graph similar and how is it different from what you graphed in (a) through (c)? 
e.Is the leisure-demand curve a cross-price demand curve? Why or why not?

Accepted Answer

a. This is illustrated with the two solid lines in the top panels of the graph.
b. The substitution effect is indicated in each of the top panels --- the income effect points in the opposite direction. On the vertical axis, the income effect implies C must lie above B.
c. No -- it depends on how large the substitution effect is relative to the income effect (as shown in the graphs).   d. The top graphs would be identical. But the bottom graphs are not -- because the wage appears on the vertical axis, and the wage is not the same as the price of consumption.   e. Not quite. The wage is not the price of consumption -- the good on the vertical axis in the top panels. Rather, the wage is the price of leisure. The models differ in that there is an exogenous income in the first case and an endogenous budget (derived from the leisure endowment) in the second case. But, when viewed as if the leisure demand curve arose from a model with exogenous income, an increase in the wage looks like a decrease in the price of consumption.

Question 3

The cross-price demand curve for Cobb-Douglas tastes is perfectly vertical.

Accepted Answer

A) True 
 B)False  True

Question 4

In order for someone to switch from borrowing to saving when the interest rate falls, it must be that current consumption is an inferior good.

Accepted Answer

A) True 
 B)False

Question 5

For the same sized substitution effect, own-price demand curves for inferior goods are steeper than own price demand curves for normal goods.

Accepted Answer

A) True 
 B)False

Question 6

If tastes are homothetic in leisure and consumption, labor supply curves slope up.

Accepted Answer

A) True 
 B)False

Question 7

Holding all prices fixed, income-demand curves relate changes in exogenous income to changes in the quantity of a good demanded.

Accepted Answer

A) True 
 B)False

Question 8

The empirically observed backward-bending labor supply curve cannot arise from homothetic tastes.

Accepted Answer

A) True 
 B)False

Question 9

Leisure being an inferior good is necessary but not sufficient for labor supply to slope up.

Accepted Answer

A) True 
 B)False

Question 10

Since income and substitution effects point in the same direction for normal goods, the leisure demand curve will be shallower if leisure is a normal good than if leisure is an inferior good.

Accepted Answer

A) True 
 B)False

Question 11

When tastes are quasilinear in leisure, the labor supply curve is vertical.

Accepted Answer

A) True 
 B)False

Question 12

Suppose your tastes over consumption and leisure have constant elasticity of substitution.I observe that, when your wage went up, you continued to work the same number of hours.From this, I can conclude that you have Cobb-Douglas tastes.

Accepted Answer

A) True 
 B)False

Question 13

An increase in the price of good 2 will cause the demand curve for good 1 to shift out.

Accepted Answer

A) True 
 B)False

Question 14

A downward sloping income-demand curve indicates that the good is a necessity.

Accepted Answer

A) True 
 B)False

Question 15

If future consumption is a normal good, the interest rate/borrowing relationship cannot be upward sloping.

Accepted Answer

A) True 
 B)False

Question 16

Suppose that utility over consumption and leisure takes the constant elasticity of substitution form   .If   falls between 0 and -1, then the labor supply curve is backward bending.

Accepted Answer

A) True 
 B)False

Question 17

Leisure being a normal good is neither necessary nor sufficient for labor supply to slope up.

Accepted Answer

A) True 
 B)False

Question 18

Goods like exclusive designer clothes carry with them prestige value linked to their price.As a result, some people demand more of such goods as the price increases.For those people, such goods are Giffen goods.

Accepted Answer

A) True 
 B)False

Question 19

If a good is quasilinear, its own-price demand curve is vertical.

Accepted Answer

A) True 
 B)False

Question 20

Suppose your tastes can be represented by the utility function   .Your demand for   is

Accepted Answer

A)    . 
B)    . 
C)    
D)    
E) None of the above 
A)    . 
B)    . 
C)    
D)    
E) None of the above

Exam 9: Demand for Goods and Supply of Labor and Capital

Assuming the same sized substitution effect, normal goods have steeper cross-price demand curves than inferior goods.

The cross-price demand curve for Cobb-Douglas tastes is perfectly vertical.

In order for someone to switch from borrowing to saving when the interest rate falls, it must be that current consumption is an inferior good.

For the same sized substitution effect, own-price demand curves for inferior goods are steeper than own price demand curves for normal goods.

If tastes are homothetic in leisure and consumption, labor supply curves slope up.

Holding all prices fixed, income-demand curves relate changes in exogenous income to changes in the quantity of a good demanded.

The empirically observed backward-bending labor supply curve cannot arise from homothetic tastes.

Leisure being an inferior good is necessary but not sufficient for labor supply to slope up.

Since income and substitution effects point in the same direction for normal goods, the leisure demand curve will be shallower if leisure is a normal good than if leisure is an inferior good.

When tastes are quasilinear in leisure, the labor supply curve is vertical.

Suppose your tastes over consumption and leisure have constant elasticity of substitution.I observe that, when your wage went up, you continued to work the same number of hours.From this, I can conclude that you have Cobb-Douglas tastes.

An increase in the price of good 2 will cause the demand curve for good 1 to shift out.

A downward sloping income-demand curve indicates that the good is a necessity.

If future consumption is a normal good, the interest rate/borrowing relationship cannot be upward sloping.

Suppose that utility over consumption and leisure takes the constant elasticity of substitution form .If falls between 0 and -1, then the labor supply curve is backward bending.

Leisure being a normal good is neither necessary nor sufficient for labor supply to slope up.

Goods like exclusive designer clothes carry with them prestige value linked to their price.As a result, some people demand more of such goods as the price increases.For those people, such goods are Giffen goods.

If a good is quasilinear, its own-price demand curve is vertical.

Suppose your tastes can be represented by the utility function .Your demand for is

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

Income and Substitution Effects in Consumer Goods Markets

Wealth and Substitution Effects in Labor and Capital Markets

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