Chapter 3: Individual Demand Curves

If the income effect is in the same direction as the substitution effect then the good is
1. normal
2. inferior but not Giffen
3. Giffen
4. There is not enough information to answer.
If the income effect is in the opposite direction as the substitution effect but the substitution effect dominates then the good is
1. normal
2. inferior but not Giffen
3. Giffen
4. There is not enough information to answer.
Suppose two goods coffee and cream provide the consumer with utility but only if they are consumed in fixed proportions. An increase in the price of coffee will yield
1. a substitution effect and an income effect in opposite direction.
2. a substitution effect and an income effect in the same direction.
3. a substitution effect but no income effect.
4. an income effect but no substitution effect.
Suppose you were to believe that “money illusion” exists that is as prices and incomes both rise proportionally, people buy more. Which of the following characteristics of demand does that cause you to doubt?
1. demand functions are downward sloping.
2. demand has a positive vertical intercept.
3. demand has a positive horizontal intercept.
4. demand functions are homogeneous of degree zero.
Suppose there are two goods (X and Y). On a traditional graph of a budget line a tripling of all prices and incomes will
1. alter the slope of the budget line only.
2. alter the slope of the budget line as well as the y-intercept.
3. alter the slope of the budget line as well as the x-intercept.
4. leave the budget line unaltered.
The lump sum principle suggests that the tax that reduces utility the least is
1. a tax on income.
2. a tax on one good, not all goods.
3. an equal tax on all goods, not income.
4. an unequal tax on all goods, not income.
If a good is normal and its price increases,
1. the income effect will be positive and the substitution effect will be positive.
2. the income effect will be negative and the substitution effect will be negative.
3. the income effect will be positive and the substitution effect will be negative.
4. the income effect will be negative and the substitution effect will be positive.
Suppose U = min(X, Y) and the price of X is 1, the price of Y is 1 and income is $12. If the price of X increases to 2, the substitution effect is
1. 2
2. -1
3. 0
4. -2
Suppose U = min(X, Y) and the price of X is 1, the price of Y is 1 and income is $12. If the price of X increases to 2, the substitution effect is
1. 2
2. -1
3. 0
4. -2
If the prices of all goods increase by the same proportion as income, the quantity demanded of good X will
1. decrease.
2. increase.
3. remain unchanged.
4. change in a way that cannot be determined from the information given.

Chapter 3: Individual Demand Curves

Multiple Choice Questions