Exam 5: Applying Consumer Theory

An individual derives utility from consuming "all other goods," g,and clean air (measured by the reduction in particulate matter per m³),a,as measured by the utility function U(g,a)= g^0.6a^0.4.The price of consumer goods equals $20 and the price of clean air (abatement)equals $10.What is the slope of the Engel curve when income increases from $100 to $200?

-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?

-When John's income was low,he could not afford to dine out and would respond to a pay raise by purchasing more frozen dinners.Now that his income is high,a pay raise causes him to dine out more often and buy fewer frozen dinners.Which graph in the above figure best represents John's Engel curve for frozen dinners?

If a good is an inferior good,then its

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?

Recent data has shown that income and volunteer time are positively related.Assuming that volunteer time is included in leisure time,what could explain this observation?

Using a Laspeyres index to calculate the Consumer Price Index (CPI)

-The above figure shows Bobby's indifference map for soda and juice.B₁ indicates his original budget line.B₂ indicates his budget line resulting from an increase in the price of soda.From the graph,one can conclude that

What is the slope of the price consumption curve for two goods,x and y,when preferences are measured by the utility function U(x,y)= x^0.5y^0.5,the price of good y is $10,income equals $100,and the price of good x increases from $5 to $10?

Many manufacturers sell products labeled as having imperfections at a discount at their factory outlets but do not ship these imperfect goods to regular retail outlets.Why?

Consider two lottery winners,Tino who is 65 years old and Sasha who is 32 years old.Which of these two would be expected to have the larger income effect,all else equal?

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

Deriving Demand Curves -The above figure shows Bobby's indifference map for juice and snacks.Also shown are three budget lines resulting from different prices for snacks.This information could be used to determine

When measuring the substitution effect,one uses the change along

Both Sally and Sam receive a 10% raise in a single year.Sally increases her demand for ground beef whereas Sam decreases his demand for ground beef.

An increase in the price of a good causes

The Slutsky equation shows that,holding the total effect constant,the income effect will be larger for goods that

Median household income is $50,000 per year.The typical household spends about $125 per year on milk,which has an income elasticity of about 0.07.From this information,we can conclude that

Suppose that frozen dinners were once a normal good for John,but now frozen dinners are an inferior good for him.John's demand curve for frozen dinners

Why can't all goods be inferior?