Question

10) When the prices of a hamburger increased from $2 to $2.50, John bought more pizza. This market behavior is called: A) the Law of Demand B) the Substitution Effect C) the Income Effect D) the Law of Supply

11) When wages (as prices of labor input in production) increase, quantity supplied is ________, quantity demanded is ________, and demand for labor is _______, respectively. A) up; down; unchanged B) unknown; down; unchanged C) down; down; unknown D) down; up; unchanged

Answer 1

10) in this case as the price level of one good is increased and the consumption of the other good is increased. Under the law of demand, consumption actually decreases when there is an increase in the price. This is also not law of supply because John is not supplying but consuming. It is not an income effect because it is not given if the change in real income is used to to increase or decrease the consumption of both the goods. Therefore the correct option is option B. because the increase in price of one good has decreased its consumption and increased the consumption of the other it is the substitution effect.

11) option B is correct. Due to downward sloping demand function when there is an increase in the wage rate, quantity of labour demanded decreases. There is no change in the demand curve because changes in the wage rate will affect the quantity demanded and not the demand. There is no change in the supply curve so we do not know whether quantity supplied increases or decreases.