Question 1

Identify the statement that is true. Assume that the price of good $x$ increases.

Accepted Answer

A)  If x is a normal good, both the income and substitution effects lead to a fall in consumption of x. 
B)  The substitution effect leads to a decrease in consumption of x only if x is an inferior good. 
C)  If x is a normal good, the substitution effect alone leads to a decrease in consumption of x. 
D)  If x is an inferior good, the income effect alone leads to a decrease in consumption of good x. 
A)  If x is a normal good, both the income and substitution effects lead to a fall in consumption of x. 
B)  The substitution effect leads to a decrease in consumption of x only if x is an inferior good. 
C)  If x is a normal good, the substitution effect alone leads to a decrease in consumption of x. 
D)  If x is an inferior good, the income effect alone leads to a decrease in consumption of good x. A

Question 2

If $x$ is an inferior good and the price of $x$ falls

Accepted Answer

A)  the substitution effect will induce the consumer to purchase more $x$ and the income effect will induce the consumer to purchase more $x$ . 
B)  the substitution effect will induce the consumer to purchase more $x$ and the income effect will induce the consumer to purchase less $x$ . 
C)  the substitution effect will induce the consumer to purchase less $x$ and the income effect will induce the consumer to purchase more $x$. 
D)  the substitution effect will induce the consumer to purchase less $x$ and the income effect will induce the consumer to purchase less $x$ . 
A)  the substitution effect will induce the consumer to purchase more $x$ and the income effect will induce the consumer to purchase more $x$ . 
B)  the substitution effect will induce the consumer to purchase more $x$ and the income effect will induce the consumer to purchase less $x$ . 
C)  the substitution effect will induce the consumer to purchase less $x$ and the income effect will induce the consumer to purchase more $x$. 
D)  the substitution effect will induce the consumer to purchase less $x$ and the income effect will induce the consumer to purchase less $x$ . B

Question 3

Suppose the consumer's income elasticity for good $x$ is -0.10 when monthly income is $1,000, and the consumer's income elasticity for good $x$ is 0.10 when monthly income is $2,000. From this information we can infer that

Accepted Answer

A)  good $x$ is an inferior good for low levels of income and a superior good for high levels of income. 
B)  good $x$ is a normal good for low levels of income and an inferior good for high levels of income. 
C)  good $x$ in an inferior good for low levels of income and a normal good for high levels of income. 
D)  good $x$ is a Giffen good. 
A)  good $x$ is an inferior good for low levels of income and a superior good for high levels of income. 
B)  good $x$ is a normal good for low levels of income and an inferior good for high levels of income. 
C)  good $x$ in an inferior good for low levels of income and a normal good for high levels of income. 
D)  good $x$ is a Giffen good. C

Question 4

Identify the truthfulness of the following statements. 
I. It is possible for an Engel curve to be positively sloped for a certain region of income and negatively sloped for another region.
II) The income elasticity of demand for a normal good is negative.

Accepted Answer

A)  Both I and II are true. 
B)  Both I and II are false. 
C)  I is true; II is false. 
D)  I is false; II is true. 
A)  Both I and II are true. 
B)  Both I and II are false. 
C)  I is true; II is false. 
D)  I is false; II is true.

Question 5

A graph that plots the consumer's level of consumption of a good against the consumer's income is called a(n)

Accepted Answer

A)  price-consumption curve. 
B)  Engel curve. 
C)  demand curve. 
D)  good-consumption curve. 
A)  price-consumption curve. 
B)  Engel curve. 
C)  demand curve. 
D)  good-consumption curve.

Question 6

Under what circumstances is the demand curve upward-sloping?

Accepted Answer

A)  When the good is a normal good. 
B)  When the good is an inferior good and the substitution effect outweighs the income effect. 
C)  When the good is an inferior good and the income effect outweighs the substitution effect. 
D)  The demand curve can never be upward-sloping. 
A)  When the good is a normal good. 
B)  When the good is an inferior good and the substitution effect outweighs the income effect. 
C)  When the good is an inferior good and the income effect outweighs the substitution effect. 
D)  The demand curve can never be upward-sloping.

Question 7

Suppose that a consumer's demand curve for a good can be expressed as P = 50 - 4Qd.  Suppose that the market is initially in equilibrium at a price of $10. What is the consumer surplus at the original equilibrium price?

Accepted Answer

A)  100 
B)  150 
C)  200 
D)  250. 
A)  100 
B)  150 
C)  200 
D)  250.

Question 8

Let U(x,y) = $\sqrt { x y }$ with MUx = $\frac { \sqrt { y } } { 2 \sqrt { x } }$ and MUy = $\frac { \sqrt { x } } { 2 \sqrt { y } }$ . Let I = $100, Px = $25 and Py = $10 be the initial set of prices and income. Now, let Px fall to $10. What is the approximate compensating variation for this change in prices?

Accepted Answer

A)  24 
B)  30 
C)  34 
D)  40 
A)  24 
B)  30 
C)  34 
D)  40

Question 9

The substitution effect is

Accepted Answer

A)  the change in the amount of the good consumed holding the level of income constant. 
B)  the change in the amount of the good consumed as the price of the good changes holding income constant. 
C)  the change in the amount of the good consumed as the price of the good changes holding utility constant. 
D)  the change in the amount of the good consumed holding relative prices constant and changing the level of income. 
A)  the change in the amount of the good consumed holding the level of income constant. 
B)  the change in the amount of the good consumed as the price of the good changes holding income constant. 
C)  the change in the amount of the good consumed as the price of the good changes holding utility constant. 
D)  the change in the amount of the good consumed holding relative prices constant and changing the level of income.

Question 10

Identify the statement that is false. Assume that the price of good $x$ increases.

Accepted Answer

A)  The substitution effect shows that the consumption of good $x$ falls, regardless of whether
$x$ is a normal or inferior good. 
B)  The income effect shows that the consumption of good $x$ rises if good $x$ is an inferior good. 
C)  The overall effect shows that the consumer purchases more of good $x$ if good $x$ is a Giffen good. 
D)  The overall effect shows that the consumer purchases more of good $x$ if good $x$ is an inferior good. 
A)  The substitution effect shows that the consumption of good $x$ falls, regardless of whether
$x$ is a normal or inferior good. 
B)  The income effect shows that the consumption of good $x$ rises if good $x$ is an inferior good. 
C)  The overall effect shows that the consumer purchases more of good $x$ if good $x$ is a Giffen good. 
D)  The overall effect shows that the consumer purchases more of good $x$ if good $x$ is an inferior good.

Question 11

The substitution effect graphically is always denoted

Accepted Answer

A)  by movement along the original indifference curve, whereas the income effect is represented by a rotation of the budget line. 
B)  by moving in the direction of the item that is becoming relatively more expensive. 
C)  by moving in the direction of the item that is becoming relatively cheaper and the income effect is always denoted by a rotating budget line. 
D)  by movement along the original indifference curve, whereas the income effect is represented by a parallel shift of the budget line. 
A)  by movement along the original indifference curve, whereas the income effect is represented by a rotation of the budget line. 
B)  by moving in the direction of the item that is becoming relatively more expensive. 
C)  by moving in the direction of the item that is becoming relatively cheaper and the income effect is always denoted by a rotating budget line. 
D)  by movement along the original indifference curve, whereas the income effect is represented by a parallel shift of the budget line.

Question 12

Compensating variation is

Accepted Answer

A)  the change in income necessary to hold the consumer at the final level of utility as price changes. 
B)  always the area under the demand curve and above the price paid. 
C)  the change in income necessary to restore the consumer to the initial level of utility. 
D)  the difference in the consumer's income between the purchase of the original basket and the new basket at the old prices. 
A)  the change in income necessary to hold the consumer at the final level of utility as price changes. 
B)  always the area under the demand curve and above the price paid. 
C)  the change in income necessary to restore the consumer to the initial level of utility. 
D)  the difference in the consumer's income between the purchase of the original basket and the new basket at the old prices.

Question 13

Let U(x,y) = $\sqrt { x y }$ with MUx = $\frac { \sqrt { y } } { 2 \sqrt { x } }$ and MUy = $\frac { \sqrt { x } } { 2 \sqrt { y } }$ . Let I = $100, Px = $10 and Py = $10 be the initial set of prices and income. Now, let Px rise to $25. What are the (approximate) substitution and income effects of this change in prices?

Accepted Answer

A)  Income effect = -3.3; Substitution Effect = -2.1 
B)  Income effect = -2.3; Substitution Effect = -1.7 
C)  Income effect = -1.3; Substitution Effect = -1.7 
D)  Income effect = -1.7; Substitution Effect = -1.3 
A)  Income effect = -3.3; Substitution Effect = -2.1 
B)  Income effect = -2.3; Substitution Effect = -1.7 
C)  Income effect = -1.3; Substitution Effect = -1.7 
D)  Income effect = -1.7; Substitution Effect = -1.3

Question 14

The method for finding the substitution effect of a price change on consumption of good x is to:

Accepted Answer

A)  Find the initial optimal consumption basket before the price change and then find the decomposition basket and measure the change in consumption of the good between the two baskets. 
B)  Find the initial optimal consumption basket before the price change, then find the final optimal consumption basket after the price change and measure the change in consumption of the good between the two baskets. 
C)  Find the final optimal consumption basket after the price change and then find the decomposition basket and measure the change in consumption of the good between the two baskets. 
D)  Find the initial and final optimal consumption baskets, before and after the price change, find the decomposition basket, and add up the total changes between the two optimal baskets and the decomposition basket. 
A)  Find the initial optimal consumption basket before the price change and then find the decomposition basket and measure the change in consumption of the good between the two baskets. 
B)  Find the initial optimal consumption basket before the price change, then find the final optimal consumption basket after the price change and measure the change in consumption of the good between the two baskets. 
C)  Find the final optimal consumption basket after the price change and then find the decomposition basket and measure the change in consumption of the good between the two baskets. 
D)  Find the initial and final optimal consumption baskets, before and after the price change, find the decomposition basket, and add up the total changes between the two optimal baskets and the decomposition basket.

Question 15

Consider a market with $Q ^ { d } = 240 - 4 P + 2 I$ and $Q ^ { s } = 6 P$ . Suppose that initially income is I = 60, and that income then increases to I = 80. What is the increase in consumer surplus from this increase in income?

Accepted Answer

A)  1,300 
B)  1,368 
C)  1,421 
D)  1,472 
A)  1,300 
B)  1,368 
C)  1,421 
D)  1,472

Question 16

Suppose the consumer's utility function is given by U(x,y) = xy + y where MUx = y MUy = x+1 The equation for this consumer's demand curve for $x$ when I > Px is

Accepted Answer

A)  xd = 0 
B)  xd = $\frac { I } { 2 P _ { x } }$ 
C)  xd = $\frac { I } { 2 P _ { x } }$ -$\frac { 1 } { 2 }$ 
D)  xd = 1/2 
A)  xd = 0 
B)  xd = $\frac { I } { 2 P _ { x } }$ 
C)  xd = $\frac { I } { 2 P _ { x } }$ -$\frac { 1 } { 2 }$ 
D)  xd = 1/2

Question 17

Giffen goods

Accepted Answer

A)  are normal goods with a negative income effect. 
B)  are inferior goods with an income effect that is smaller in magnitude than the substitution effect. 
C)  are inferior goods with an income effect that is greater in magnitude than the substitution effect. 
D)  have downward sloping demand curves. 
A)  are normal goods with a negative income effect. 
B)  are inferior goods with an income effect that is smaller in magnitude than the substitution effect. 
C)  are inferior goods with an income effect that is greater in magnitude than the substitution effect. 
D)  have downward sloping demand curves.

Question 18

If a consumer's preferences for two goods, say food and clothing, are such that as income decreases, consumption of food increases but consumption of clothing decreases, we can say that

Accepted Answer

A)  food and clothing are inferior goods. 
B)  food is a normal good and clothing is an inferior good. 
C)  food is an inferior good and clothing is a normal good. 
D)  food and clothing are both normal goods. 
A)  food and clothing are inferior goods. 
B)  food is a normal good and clothing is an inferior good. 
C)  food is an inferior good and clothing is a normal good. 
D)  food and clothing are both normal goods.

Question 19

One way of thinking of consumer surplus might be described as

Accepted Answer

A)  the total value of the sum of the difference of all consumers' willingness to pay for an item relative to the actual cost of the item in the market. 
B)  the excess amount that consumers earn relative to the poverty line. 
C)  the level of satisfaction that consumers reach from consuming an item. 
D)  the excess of consumer demand relative to supply. 
A)  the total value of the sum of the difference of all consumers' willingness to pay for an item relative to the actual cost of the item in the market. 
B)  the excess amount that consumers earn relative to the poverty line. 
C)  the level of satisfaction that consumers reach from consuming an item. 
D)  the excess of consumer demand relative to supply.

Question 20

In this chapter, the term negative network externality describes

Accepted Answer

A)  the positive effect of consuming chocolate as income rises. 
B)  the snob effect. 
C)  the bandwagon effect. 
D)  the impact of a polluting firm on its local environment. 
A)  the positive effect of consuming chocolate as income rises. 
B)  the snob effect. 
C)  the bandwagon effect. 
D)  the impact of a polluting firm on its local environment.

Identify the statement that is true. Assume that the price of good $x$ increases.

If $x$ is an inferior good and the price of $x$ falls

Suppose the consumer's income elasticity for good $x$ is -0.10 when monthly income is $1,000, and the consumer's income elasticity for good $x$ is 0.10 when monthly income is $2,000. From this information we can infer that

Identify the truthfulness of the following statements. I. It is possible for an Engel curve to be positively sloped for a certain region of income and negatively sloped for another region. II) The income elasticity of demand for a normal good is negative.

A graph that plots the consumer's level of consumption of a good against the consumer's income is called a(n)

Under what circumstances is the demand curve upward-sloping?

Suppose that a consumer's demand curve for a good can be expressed as P = 50 - 4Q^d. Suppose that the market is initially in equilibrium at a price of $10. What is the consumer surplus at the original equilibrium price?

The substitution effect is

Identify the statement that is false. Assume that the price of good $x$ increases.

The substitution effect graphically is always denoted

Compensating variation is

The method for finding the substitution effect of a price change on consumption of good x is to:

Consider a market with $Q ^ { d } = 240 - 4 P + 2 I$ and $Q ^ { s } = 6 P$ . Suppose that initially income is I = 60, and that income then increases to I = 80. What is the increase in consumer surplus from this increase in income?

Suppose the consumer's utility function is given by U(x,y) = xy + y where MU_x = y MU_y = x+1 The equation for this consumer's demand curve for $x$ when I > P_x is

Giffen goods

If a consumer's preferences for two goods, say food and clothing, are such that as income decreases, consumption of food increases but consumption of clothing decreases, we can say that

One way of thinking of consumer surplus might be described as

In this chapter, the term negative network externality describes

Analyzing Economic Problems

Demand and Supply Analysis

Consumer Preferences and the Concept of Utility

Consumer Choice

Inputs and Production Functions

Costs and Cost Minimization

Cost Curves

Perfectly Competitive Markets

Competitive Markets: Applications

Monopoly and Monopsony

Capturing Surplus

Market Structure and Competition

Game Theory and Strategic Behavior

Risk and Information

General Equilibrium Theory

Externalities and Public Goods

Filters

Exam 5: The Theory of Demand

Identify the statement that is true. Assume that the price of good xxx increases.

If xxx is an inferior good and the price of xxx falls

Suppose the consumer's income elasticity for good xxx is -0.10 when monthly income is $1,000, and the consumer's income elasticity for good xxx is 0.10 when monthly income is $2,000. From this information we can infer that

Identify the truthfulness of the following statements. I. It is possible for an Engel curve to be positively sloped for a certain region of income and negatively sloped for another region. II) The income elasticity of demand for a normal good is negative.

A graph that plots the consumer's level of consumption of a good against the consumer's income is called a(n)

Under what circumstances is the demand curve upward-sloping?

Suppose that a consumer's demand curve for a good can be expressed as P = 50 - 4Qd. Suppose that the market is initially in equilibrium at a price of $10. What is the consumer surplus at the original equilibrium price?

The substitution effect is

Identify the statement that is false. Assume that the price of good xxx increases.

The substitution effect graphically is always denoted

Compensating variation is

The method for finding the substitution effect of a price change on consumption of good x is to:

Consider a market with Qd=240−4P+2IQ ^ { d } = 240 - 4 P + 2 IQd=240−4P+2I and Qs=6PQ ^ { s } = 6 PQs=6P . Suppose that initially income is I = 60, and that income then increases to I = 80. What is the increase in consumer surplus from this increase in income?

Suppose the consumer's utility function is given by U(x,y) = xy + y where MUx = y MUy = x+1 The equation for this consumer's demand curve for xxx when I > Px is

Giffen goods

If a consumer's preferences for two goods, say food and clothing, are such that as income decreases, consumption of food increases but consumption of clothing decreases, we can say that

One way of thinking of consumer surplus might be described as

In this chapter, the term negative network externality describes

Analyzing Economic Problems

Demand and Supply Analysis

Consumer Preferences and the Concept of Utility

Consumer Choice

Inputs and Production Functions

Costs and Cost Minimization

Cost Curves

Perfectly Competitive Markets

Competitive Markets: Applications

Monopoly and Monopsony

Capturing Surplus

Market Structure and Competition

Game Theory and Strategic Behavior

Risk and Information

General Equilibrium Theory

Externalities and Public Goods

Filters

Identify the statement that is true. Assume that the price of good $x$ increases.

If $x$ is an inferior good and the price of $x$ falls

Suppose the consumer's income elasticity for good $x$ is -0.10 when monthly income is $1,000, and the consumer's income elasticity for good $x$ is 0.10 when monthly income is $2,000. From this information we can infer that

Suppose that a consumer's demand curve for a good can be expressed as P = 50 - 4Q^d. Suppose that the market is initially in equilibrium at a price of $10. What is the consumer surplus at the original equilibrium price?

Identify the statement that is false. Assume that the price of good $x$ increases.

Consider a market with $Q ^ { d } = 240 - 4 P + 2 I$ and $Q ^ { s } = 6 P$ . Suppose that initially income is I = 60, and that income then increases to I = 80. What is the increase in consumer surplus from this increase in income?

Suppose the consumer's utility function is given by U(x,y) = xy + y where MU_x = y MU_y = x+1 The equation for this consumer's demand curve for $x$ when I > P_x is