ch4 Flashcards
As the price of a good rises, the consumer will experience
a desire to consume a different bundle, a decrease in utility, and a southern or western movement on the indifference map.
When the price of a good changes, the substitution effect can be found by comparing the
equilibrium quantities purchased
on the original indifference curve when faced with the original prices and when faced with the
new prices.
When the price of a good changes, the income effect can be found by comparing the
equilibrium quantities purchased
on the new budget line and a hypothetical budget line that is a shift back to the original
indifference curve parallel to the new budget line.
What is the primary difference between the substitution and the income effect of a price
change?
The substitution effect holds utility constant and the income effect holds prices constant.
If a good is considered a normal good, the demand curve will shift ________ when income
increases because ________.
right; the income and substitution effects move in the same direction
B) right; the income and substitution effects move in the opposite directi
The amount of money one would have to give to a consumer to offset the harm from a price
increase is called
compensating variation.
The amount of money one would have to take from a consumer to harm her by as much as
the price increase is called
equivalent variation.
A Consumer Price Index (CPI) adjustment overcompensates for inflation because it ignores
the substitution effect when relative prices change.
A true cost-of-living adjustment (COLA) in response to a change in prices would compensate
consumers so that they would be able to
achieve the same level of utility they did before prices changed.
If a person supplies more hours of labor in response to a wage increase, then
the substitution effect is greater than the income effect
If a person supplies fewer hours of labor in response to a wage increase, then
the income effect is greater than the substitution effect.
Newspaper accounts of the U.S. labor market often point out that many people are working
more hours than their parents did. What might explain this phenomenon?
the substitution effect
