Question

Q9: Choose the BEST answer.

Most demand curves have a negative slope because

a. an increase in price reduces real income and the income effect always causes consumers to reduce consumption of a commodity when income falls.

b. the substitution effect always leads consumers to substitute higher quality goods for lower quality goods.

c. the substitution effect always causes consumers to try to substitute away from the consumption for a commodity when the commodity’s price rises.

Q11: Choose the BEST answer.

We have asked Max to rank his preferences between three market baskets, A, B, and C. If Max prefers B to C but does not care if he gets A or B, then

a. B is on a higher indifference curve than C but it is not possible to determine whether C is on a higher, lower, or the same indifference curve as A.

b. B and C are on the same indifference curve.

c. C is on a higher indifference curve than A.

Answer 1

a) A demand curve is downward sloping because of the income effect. An increase in price reduces real income and the income effect always causes consumers to reduce consumption of a commodity when income falls. the answer is "A".

b) As Max is preferring B over C that means B is on the higher indifference curve and the overall benefit is more there, But we cannot say the same about the A. the answer is "A", B is on a higher indifference curve than C but it is not possible to determine whether C is on a higher, lower, or the same indifference curve as A.