Question

Determine whether or not the following statements are true or false.

A. If the price consumption curve (as the price of x changes) is horizontal, then good y must be a normal good.

B. If the income-consumption curve is upward sloping, then the price consumption curve (as the price of x changes) must be upward sloping too.

C. If the income-consumption curve is a horizontal line, then the cross-price elasticity of demand for good y with respect to the price of good x must be positive.

D. If the Engel curve for good x is vertical, then the law of demand must hold for good x.

E. A tax cut that raises the after-tax wage rate will most likely result in more hours worked if the substitution effect outweighs the income effect.

Answer 1

A. False. It is a neutral good as consumption of Y is constant in this case while that of X changes as per change in price.

B. False. PCC can be upward or downward sloping.

C. False. In this case, change in quantity demanded of Y is zero and so elasticity is also zero.

D. True. Engel curve shows the effect of the change in consumption due to change in income. Vertical EC means a change in income is not changing demand but this does not rule out the law of demand.

E. True. Willingness to work increases with increase in disposable personal income.