Question

10) If MUx/Px < MUy/Py, then

A) spending a dollar less on Y and a dollar more on X increases utility.

B) spending a dollar less on X and a dollar more on Y increases utility.

C) X is more expensive than Y.

D) Y is more expensive than X.

11) Ellie is spending her entire income on goods X and Y. Her marginal utility from the last unit of X is 100 and the marginal utility from the last unit of Y that she consumes is 50. Ellie's utility is only maximized if

A) the prices of X and Y are the same.

B) the price of good X is twice that of good Y.

C) the price of good Y is twice that of good X.

D) We cannot determine whether Ellie is maximizing her utility.

12) For normal goods

A) the substitution and income effects of a price decrease will both decrease the quantity of the good demanded.

B) the substitution and income effects of a price decrease will both increase the quantity of the good demanded.

C) the substitution effect of a price decrease will increase the quantity of the good demanded while the income effect of a price decrease will decrease the quantity of the good demanded.

D) the substitution effect of a price decrease will decrease the quantity of the good demanded while the income effect of a price decrease will increase the quantity of the good demanded.

13) For inferior goods

A) the substitution and income effects of a price increase will both decrease the quantity of the good demanded.

B) the substitution and income effects of a price increase will both increase the quantity of the good demanded.

C) the substitution effect of a price increase will increase the quantity of the good demanded while the income effect of a price increase will decrease the quantity of the good demanded.

D) the substitution effect of a price increase will decrease the quantity of the good demanded while the income effect of a price increase will increase the quantity of the good demanded.

Answer 1

10.

MUx/Px < MUy/Py

It implies that the additional utility derived from consuming one more unit Y is higher than the additional utility derived from consuming one more unit of X.

So, consumer will spend more on Y and less amount on X

More consumption on Y good increases utility of the consumer

Option B) is correct

11.

MRS = MUx / MUy = 100 / 50 = 2

Utility will be maximized iff MRS = Px / Py

So, Px has to be twice the value as it is for price of Y.

Option B) is correct

12.

Substitution effect is always negative regardless of the good type. An increase in price reduces the quantity demnaded and vice-versa.

For the Normal Good, a fall in the price of a good, due to income effect the consumption of the good increases.

Both substitution and income effect work in the same direction.

So, option B) is correct

13.

For inferior good, income effect > substitution effect. Consumer purchases more amount of goods if the goods' price increases. Substitution effect is negative. It implies that a price increase will decrease the quantity demanded of a good.

Hence, option D) is correct