Question

5. John and Mary argue that if income increases by 1% and the quantity demanded of good x increases by 0.5%, then good x can be described as a (1) Necessity good. (2) Luxury good. (3) Giffen good.

Which of their three statements are true?

(a) Only (1) [CORRECT ANSWER]

(b) Only (2)

(c) (1) and (3)

(d) (2) and (3)

6. Suppose production function is given by f(k, l) = k^(2/3) l^ (2/ 3) , then the elasticity of substitution is

(a) 2

(b) 1 [CORRECT ANSWER]

7. Suppose E(px, py, U) = 2 root(px,py, U) with U > 0. Then,

(a) y is a net complement for x and x is a net substitute for y (

b) y is a net substitute for x and x is a net substitute for y [CORRECT ANSWER]

Answer 1

ans 5=option a=only 1(necessity product)

YED is described as the responsiveness of demand whilst an individual’s income level changes. Its described as the proportion of the change in the quantity demanded (Qd) over the change in the level of income.(Y)

A normal product has a YED > 0. This implies that the demand for a normal product will rise as the individual’s income rises.

Necessities have a YED between 0 & +1. For instance, a staple such as bread could be regarded as a necessity product.