Question

2. Jerome consumes only two goods, eggs and beans. His preferences are complete, transitive, monotonic and convex. When the price of beans rises, he buys fewer eggs and the same amount of beans. Based on this information, we can say that

a. Beans are necessarily normal and eggs are necessarily inferior. b. Beans are necessarily inferior and eggs are necessarily normal. c. We can only conclude that beans are necessarily normal. d. We can only conclude that eggs are necessarily normal. e. We can only conclude that eggs are necessarily inferior.

3. Consider the truthfulness of the following statement. I. If a good is a normal good, its demand curve necessarily slopes downward. II. If a good’s demand curve slopes downward, it is necessarily a normal good.

a. Only statement I is true. b. Only statement II is true. c. Both statements I and II are true. d. Neither statement is true.

4. Suppose an individual’s utility function is U x y x y ( , ) 2    , and her total budget is $90. The price of y is always $1, but the price of x drops from $1 to 50 cents. Calculate the substitution effect on x and the income effect on y.

a. SE= +32 X; IE= +10 Y b. SE= +32 X; IE= - 22 Y c. SE= +18 X; IE= - 22 Y d. SE= +18 X; IE= +10 Y e. None of the above

Answer 1