Deck 3: Income and Substitution Effects

Question 1

Consider the two following statements:
I.x is an inferior good.
II.x exhibits Giffen's Paradox.
Which of the following is true?

A)I implies II,but II does not necessarily imply I.
B)II implies I,but I does not necessarily imply II.
C)I and II are statements of the same phenomenon.

Answer 1

II implies I,but I does not necessarily imply II.

Question 2

If income doubles and the quantity demanded of good x more than doubles,then good x can be described as a:

A)substitute good.
B)complement good.
C)necessity.
D)luxury.

Answer 2

luxury.

Question 3

If there are only two goods and these are consumed in fixed proportions,the price elasticities of demand for these two goods will sum to:

A)0.0.
B)-0.5.
C)-1.0.
D)a number between 0 and -1.

Answer 3

-1.0.

Question 4

The price elasticity of demand for a horizontal demand curve is:

A)0.
B)-1.
C)1.
D)- infinity.

Question 5

Which of the following demand functions is not homogenous of degree zero in p_x ,p_y ,and I?

A)
B)
C)
D)

Question 6

Demand functions are "homogeneous of degree zero in all prices and income." This means:

A)a proportional increase in all prices and income will leave quantities demanded unchanged.
B)a doubling of all prices will not alter consumption decisions.
C)prices directly enter individuals' utility functions.
D)an increase in income will cause all quantities demanded to increase proportionately.

Question 7

A decrease in demand is represented by:

A)a shift outward of the entire demand curve.
B)a shift inward of the entire demand curve.
C)a movement along the demand curve in a southeasterly direction.
D)a movement along the demand curve in a northwesterly direction.

Question 8

Consider the linear demand curve This demand curve will have a price elasticity of demand of -1 when price is equal to:​

A)​
B)​
C)​
D)​

Question 9

The price elasticity of demand for a linear demand curve follows the pattern (moving from high prices to low prices):

A)elastic,unit elastic,inelastic.
B)unit elastic,inelastic,elastic.
C)inelastic,unit elastic,elastic.
D)elastic,inelastic,unit elastic.

Question 10

If a consumer purchases only two goods (x and y)and the demand for x is elastic,then a rise in the price of x:

A)will cause total spending on good y to rise.
B)will cause total spending on good y to fall.
C)will cause total spending on good y to remain unchanged.
D)will have an indeterminate effect on total spending on good y.

Question 11

If an individual buys only two goods and these must be used in a fixed relationship with one another (e.g. ,coffee and cream for a coffee drinker who never varies the amount of cream used in each cup),then:

A)there is no substitution effect from a change in the price of coffee.
B)there is no income effect from a change in the price of coffee.
C)Giffen's Paradox must occur if both coffee and cream are inferior goods.
D)an increase in income will not affect cream purchases.

Question 12

Consider the following three concepts:
I.Marshall Demand [ ])
II.Indirect Utility [ ])
III.Compensated Demand [ ])
Which of these functions is necessarily homogeneous of degree zero in all its argument?

A)All of them
B)None of them
C)Only I
D)I and III,but not II

Question 13

Which of the following will not cause a demand curve to shift position?

A)A doubling of the good's price
B)A doubling of the price of a closely substitutable good
C)A doubling of income
D)A shift in preferences

Question 14

If the demand for a product is elastic,then a rise in price will:

A)cause total spending on the good to increase.
B)cause total spending on the good to decrease.
C)keep total spending the same,but reduce the quantity demanded.
D)keep total spending the same,but increase the quantity demanded.

Question 15

If the compensated (Hicks)and Marshall demand curves for a good intersect,at that point the Marshall curve will be:

A)flatter if this is a normal good.
B)steeper if this is a normal good.
C)flatter if this is an inferior good.
D)horizontal.

Question 16

The price elasticity of demand for a vertical demand curve is:

A)0.
B)-1.
C)1.
D)- infinity.

Question 17

An individual's demand curve:

A)represents the various quantities that a consumer is willing to purchase of a good at various price levels.
B)is derived from an individual's indifference curve map.
C)will shift if preferences,prices of other goods,or income change.
D)all of these answers are correct.

Question 18

Assume x and y are the only two goods a person consumes.If after a rise in p_X the quantity demanded of y increases,one could say:

A)the income effect dominates the substitution effect.
B)the substitution effect dominates the income effect.
C)it is still impossible to determine whether the substitution or income effect dominates.
D)none of the answers is correct.

Question 19

The price elasticity of demand for good x is defined as:

A)percentage change in p_x / percentage change in x.
B)percentage change in x /percentage change in p_x.
C)percentage change in x/percentage change in income.
D)percentage change in x /percentage change in p_y.

Question 20

If the prices of all goods increase by the same proportion as income,the quantity demanded of good x will:

A)decrease.
B)increase.
C)remain unchanged.
D)change in a way that cannot be determined from the information given.

Question 21

Often economists measure the loss in consumer surplus by looking at the changing area below the Marshallian demand curve.This approach will provide a more accurate measure of the compensating variation of such a price increase if:​

A)​the good occupies a small portion of a person's budget.
B)​the good occupies a large portion of a person's budget.
C)​the good has many close substitutes.
D)​the good has few substitutes.

Question 22

Here are three possible definitions of "Compensating Variation":
I.the amount a person would be willing to pay to avoid a price increase.
II.the amount of additional income needed to allow a person to restore his or her utility back to its initial level after it has been reduced by a price increase.
III.the amount of income that a person who experienced a price increase would be willing to pay to see the price return to its earlier level.
Which of these definitions is (are)correct?

A)​Only I
B)​I and II
C)​II and III
D)​Only III