Question

1. The effect that measures only the impact of a relative price change holding utility constant is called the ____________.

a) substitution effect b) relative price effect c) income effect d) utility constant effect

2. If the demand for canned meat decreases as real income increases, this means that canned meat is a/an ________.

a) normal good b) basic good c) consumer good d) inferior good

3. A Giffen good is a good that is ______.

a) a normal good with a strong income effect b) an inferior good without a strong income effect c) a normal good where the negative income effect will equal the substitution effect d) an inferior good where the negative income effect outweighs the substitution effect

4. We can find a market demand curve by ______.

a) adding consumer utility b) adding the sum of all demand curves vertically c) multiplying all demand curves d) adding the sum of all demand curves horizontally

5. It is possible that consumers will increase their demand for a good as more consumers buy the good because_______.

a) of economies of scale b) the supply of the good will increase c) sometimes a good is more useful as more people use it d) there is a fear of shortage

6. An example of a negative network externality is the ______.

a) virtual effect b) snob effect c) bandwagon effect d) income effect

7. An Engel curve for good describes

a) how the consumption of good varies as the price of good changes. b) how the consumption of good varies as the consumer’s income changes. c) how the consumption of good varies as the consumption of good changes. d) how the consumption of good varies as price-consumption curve changes.

*** PAY close attention to the fact that A is the original bskt, and B is the bskt following the price change. So what has happened to the price of food…?

8. The substitution effect of the price change in food on the quantity of food purchased is:

a. the change from F3 to F1. b. the change from F3 to F2. c. the change from F2 to F1. d. the change from F1 to F2. e. none of the above.

9. For the same graph above: The income effect of the price change in food on the quantity of food purchased is:

a. the change from F3 to F1. b. the change from F3 to F2. c. the change from F2 to F1. d. the change from F1 to F2. e. none of the above.

10. Based on the above graph and your answers to 8 and 9, food is:

a. a normal good. b. an inferior good, but not a Giffen good. c. a Giffen good. d. none of the above.

Answer 1

1. The effect that measures only the impact of a relative price change holding utility constant is called the substitution effect.

2. If the demand for canned meat decreases as real income increases, this means that canned meat is a/an normal good. The demand for a normal good goes up with an increase in real income of the buyer. If the demand falls the goods will be called as inferior good.

3. A Giffen good is a good that is an inferior good where the negative income effect outweighs the substitution effect.

4. We can find a market demand curve by adding the sum of all demand curves horizontally. Market demand curve can be arrived by horizontal summation of individual demand schedules.