Question

Determine whether or not the following statements are true or false.

A. If the income consumption curve is vertical, the Engel curve for good y is upward sloping.

B. If the price consumption curve (as the price of good x changes) is vertical, the price elasticity of demand for good x is zero.

C. An upward sloping price consumption curve (as the price of good x changes) indicates that goods x and y are complements in consumption.

D. If preferences over goods x and y are represented by U(x,y) = 3x^1/2 y^1/2 , the price consumption curve (as the price of x changes) is necessarily horizontal.

E. If U(x,y)= 3 + ln(x) + 5y, the income consumption curve is vertical, assuming an interior solution.

Answer 1

1) If the income consumption curve is vertical, the Engel curve for good y is upward sloping.

Solution: True

Explanation: When the income consumption curve is vertical, Engel curve for good x is vertical and the Engel curve for good y slopes up

2) If the price consumption curve (as the price of good x changes) is vertical, the price elasticity of demand for good x is zero.

Solution: True

Explanation: When the price consumption curve is vertical when the price of x changes, then the demand for x is zero i.e. perfectly inelastic

3) An upward sloping price consumption curve (as the price of good x changes) indicates that goods x and y are complements in consumption

Solution: True

Explanation: Upward-sloping if good X is normal; when the price of good X falls, the quantity demanded of both goods X and Y increases

4) If preferences over goods x and y are represented by U(x,y) = 3x^1/2 y^1/2 , the price consumption curve (as the price of x changes) is necessarily horizontal.

Solution: True

Explanation: The price consumption curve (as the price of x changes) is necessarily horizontal, the demand curve for a commodity (X) is price elastic