Question

1.The income effect of the price increase is always negative. A. True B.False 2. A positive...

1.The income effect of the price increase is always negative.

A. True B.False

2. A positive supply shock will likely benefit those firms that operate

A.in any region of the linear demand curve

B.in the elastic region of the linear demand curve

C.in the inelastic region of the linear demand curve

D.in the unitary elastic region of the linear demand curve

3.The slope of the marginal cost curve is determined by the functional form of the variable costs and the value of the fixed costs.

A. True B.False

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Homework Answers

Answer #1

Q1. B (False)

The income effect of the price increase may be positive or negative, it depends on the type of good. Income effect is the change in optimal consumption bundle or the quantity of goods consumed due to change in his income level.

Now for normal goods, as price will increase thus relative income will decrease hence one will purchase less of the normal good, thus income effect will be positive (as direct relation between quantity demanded and income) . However in case of inferior goods whose consumption increase with decreae in income, income effect will be negative.

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