Ch.5 Flashcards
the price consumption curve traces optimal market baskets
for different prices of goods
A consumer considers apples and oranges are perfect subst
itutes, one for one.
If apples
currently cost $5 per unit and oranges $6 per unit, and if the price of apples increases to
$9 per unit,
the entire change in demand for apples will be due to the substitution effect.
The demand function for C derived from a Cobb-Douglas utility function, U = CαMα-1
depends upon
income and the price of C
If an individual’s demand curve for apples is a downward sloping straight line, the price consumption curve will be
u–shaped.
If the price-consumption curve is horizontal, then demand elasticity
equals 1
The substitution effect of a price decrease
is a movement on the indifference curve to consume more of the lower priced
good and less of the higher priced good.
The substitution effect of a price
change
will always result in the consumer buying less of a good at a higher price.
Inferior goods are usually
narrowly defined goods facing higher-quality substitutes
The difference between an inferior good with a negatively sloped demand curve and
a Giffen good is that
the income effect is larger than the substitution effect for a Giffen good but is smaller than the substitution effect for the inferior good
If the price of X increases and the demand for Y decreases, then
X and Y are complements
Assume that peanut butter is an inferior good. Which of the following best describes the
income and substitution effects as the price of peanut butter rises?
The substitution effect causes the consumer to buy less peanut butter while the
income effect cause
s the consumer to purchase more.
For a Giffen good, which of the following must be true?
The good must be inferior and the income effect must be larger than the substitution effect
Assume that as the price of good X rises, the
demand for good Z shifts outward. On the
basis of this information we can conclude that
goods X and Z are substitutes.
Troy likes attending Major League Baseball games and going to concerts. Following a
10% increase in the price of tickets to Major League Baseball games, Troy’s attendance
fell by 10%. If tickets to MLB games is on the horizontal axis and tickets to concerts on
the vertical axis, using the information above, we can conclude that Troy’s price
-consumption curve between tickets to MLB games and tickets to concerts is
horizontal
A movement upward along an upward sloping Engel curve corresponds to
a parallel shift in the budget constraint
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.
This is only possible if Sally has lower income than Sam.
Suppose Lisa spends all of her money on books and coffee. When the price of coffee
decreases, the
substitution effect on coffee is positive, and the income effect on coffee is
ambiguous
True or False:
A good may be inferior at some income levels and normal at others.
True
If a person supplies more hours of labor in response to a wage increase, then
the substitution effect is greater than the income effect
