Question

1. If the price elasticity of demand for a good is -1, then doubling the price...

1. If the price elasticity of demand for a good is -1, then doubling the price of that good will leave total expenditures on that good unchanged.

2. An increase in the price of an inferior good makes the people who consume that good better off.

3. Ambrose has an indifference curve with equation x2 = 20 - 4(x1)0.5. When Ambrose is consuming the bundle (4, 16), his marginal rate of substitution is 25/4.

True or false? Why?

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Homework Answers

Answer #1

Solution:

1.the price elasticity of demand for a good is -1, then doubling the price of that good will leave total expenditures on that good unchanged.

The given statement is false

explanation:

since when the price elasticity of demand is less than one the increase in price will lead to an increase in total expenditure. Price, elasticity of demand and expenditure will move in same direction when elasticity of demand is less than one.

2.An increase in the price of an inferior good makes the people who consume that good better off.

The given statement is true

explanation:

When price of an inferior good falls, its negative income effect will tend to reduce the quantity purchased, while the substitution effect will tend to increase the quantity purchased. But normally it happens that negative income effect of change in price is not large enough to outweigh the substitution effect.

3.Ambrose has an indifference curve with equation x2 = 20 - 4(x1)0.5. When Ambrose is

consuming the bundle (4, 16), his marginal rate of substitution is 25/4.

The given statement is false

explanation:



Therefore in our case,



Putting x1=4 or x1^0.5 = 2, we get

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