Ch.5

Question 1

the price consumption curve traces optimal market baskets

Answer 1

for different prices of goods

Question 2

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,

Answer 2

the entire change in demand for apples will be due to the substitution effect.

Question 3

The demand function for C derived from a Cobb-Douglas utility function, U = CαMα-1
depends upon

Answer 3

income and the price of C

Question 4

If an individual’s demand curve for apples is a downward sloping straight line, the price consumption curve will be

Answer 4

u–shaped.

Question 5

If the price-consumption curve is horizontal, then demand elasticity

Answer 5

equals 1

Question 6

The substitution effect of a price decrease

Answer 6

is a movement on the indifference curve to consume more of the lower priced
good and less of the higher priced good.

Question 7

The substitution effect of a price

change

Answer 7

will always result in the consumer buying less of a good at a higher price.

Question 8

Inferior goods are usually

Answer 8

narrowly defined goods facing higher-quality substitutes

Question 9

The difference between an inferior good with a negatively sloped demand curve and
a Giffen good is that

Answer 9

the income effect is larger than the substitution effect for a Giffen good but is smaller than the substitution effect for the inferior good

Question 10

If the price of X increases and the demand for Y decreases, then

Answer 10

X and Y are complements

Question 11

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?

Answer 11

The substitution effect causes the consumer to buy less peanut butter while the
income effect cause
s the consumer to purchase more.

Question 12

For a Giffen good, which of the following must be true?

Answer 12

The good must be inferior and the income effect must be larger than the substitution effect

Question 13

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

Answer 13

goods X and Z are substitutes.

Question 14

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

Answer 14

horizontal

Question 15

A movement upward along an upward sloping Engel curve corresponds to

Answer 15

a parallel shift in the budget constraint

Question 16

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.

Answer 16

This is only possible if Sally has lower income than Sam.

Question 17

Suppose Lisa spends all of her money on books and coffee. When the price of coffee
decreases, the

Answer 17

substitution effect on coffee is positive, and the income effect on coffee is
ambiguous

Question 18

True or False:

A good may be inferior at some income levels and normal at others.

Answer 18

True

Question 19

If a person supplies more hours of labor in response to a wage increase, then

Answer 19

the substitution effect is greater than the income effect