1. Consumer’s initial income at A is $………………… 2. How much income is needed to bu
ID: 1139217 • Letter: 1
Question
1. Consumer’s initial income at A is $…………………
2. How much income is needed to buy the old level of utility at new prices……….…..
3. How much income is needed to buy the old basket of goods at new prices …………….
4. How much more / less compensation would you get under cost of living adjustment…………..
5. Show price effect, substitution effect, and income effect for X in the diagram
6. Show price effect, substitution effect, and income effect for Y in the diagram
7. In this example inflation is about (pick one) (a) 42% (b) 26% (c) 0.8% (d) 0.7%
8. Calculate EdQx:Px at point A (i.e., from A to B)
EdQy:Px at point A (i.e., from A to B) =
1. 9. If ICC is a horizontal line,
a. Y is an inferior good. c. X is an inferior good
b. Y is an income-neutral good. d. X is a perfectly inelastic good.
2. 10. If the negative income effect just offsets the substitution effect, then
a. good is an inferior good.
b good is a Giffen good.
c. good have perfectly inelastic demand.
d. both a and b.
e. both a and c
10. If good X and Y are perfect complements, the indifference curves are
a. straight lines. b. right angles. c. convex to the origin. d. concave to origin
11. When the demand curve is elastic,
a. price and total expenditure move is in the same direction.
b. price and total expenditure move is the opposite direction.
c. price may be rising or falling but total expenditure is constant.
d. price may be rising or falling but total expenditure depends on supply.
12. If price of Px is falling and PCC is bending towards X axis, then
a. X is an inferior good, Y is a normal good.
b. Y is an inferior good, X is a normal good.
c. X and Y are substitutes
d. X and Y are complements
12. Law of equi-marginal utility says that
a. marginal utility should be same from all goods.
b. marginal utility of the last dollar spent should be same for all goods.
c. marginal utilities should be same as price ratio.
d. marginal rate of substitution should be same as price ratio.
13. If income elasticity is – 0.85 and incomes increases by 10%, then
a. quantity demanded will increase by 8.5%. It’s a normal good.
b. quantity demanded will decrease by 8.5%. It’s a normal good.
c. quantity demanded will decrease by 8.5%. It’s an inferior good.
d. quantity supplied will increase by 8.5%. It’s a normal good.
14. For a risk lover,
a. marginal utility from uncertain income is > marginal utility from certain income.
b. MRS is rising.
c. indifference curves are convex upwards.
d. equilibrium is a corner solution.
e. all the above.
15.Coffee and Tea are substitutes. Coffee and creamer are complements. Tea and creamer are unrelated. Then, a price increase in coffee should (it’s a hard question; think about it.)
a.decrease the quantity demanded of coffee and increase the quantity demanded of tea, but decrease the quantity demanded of creamer.
b.increase the quantity demanded of coffee and decrease the quantity demanded of tea, but increase the quantity demanded of creamer.
c.decrease the quantity demanded of coffee and increase the quantity demanded of tea, and also decrease the quantity demanded of creamer.
d.not change any demand curves; answer would really depend upon elasticities of demand.
16. For a consumer if price(s) increases, then
a. income subsidy is better than price subsidy because utility can be higher with income subsidy than with price subsidy.
b. income subsidy is based on providing the same basket of goods as price subsidy would have provided.
c. income subsidy is cheaper than the price subsidy.
d. Both a and b.
e. Both b and c.
Consumer Initial Equilibrium at A PX 5 and Py-10 Price of X increases Px- 10 Rx= 10 62 Uo 50 Ui 45 58 80Explanation / Answer
1) Income at A = Px*X +Py*Y = 5*80+10*55 = 950
2) Income needed to buy old utility = (Px’ –Px)*X = (10-5)*80 =400 more. This we wil calculate using the pivot line which has same relative price as the new budget line.
3) Income needed to buy old basket = Px’*X+Py*Y = 10*80+10*55 = $1350.
4) Less compensation of $400.
*We are supposed to do only four sub-parts to a question. For solution to other parts please post as a different question.
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