Question

1) What are the income and substitution effects?

A) A way to find if goods are substitutes to each other

B) A way to break the change in quantity demanded when prices or income change, so we can separate changes in the quantity due to higher income from changes in the quantity due to differing price ratios

C) All other answers are incorrect

D) A way to compute exactly how revenue will change if the price of a good is changed

2) What are perfect complements:

	A )There is not such concept in the book. Compliments is what we want to discuss instead, not complements :)
	B) Complementary goods of very high quality
	C) Any goods which are not substitutes are perfect complements
	D) Complementary goods that are always consumed together in fixed proportions, because they have no use if they are consumer alone

Answer 1

Answer 1:

OPTION B) A way to break the change in quantity demanded when prices or income change, so we can separate changes in the quantity due to higher income from changes in the quantity due to differing price ratios.

Reason: Income effect analyses the change in quantity demanded of a product with respect to changes in income. For example: If a good is inferior in quanlity, the momonet our income increases, we start consumer less of such inferior goods. Thus, income elasticity is negatively related.

Secondly, substitution effect analyses the change in quantity demanded of a good when price changes. If there is no change in the quantity demanded of a good when its price is increased or decreased, it means that such a good is inelastic in its demand.

Answer 2:

OPTION D) Complementary goods that are always consumed together in fixed proportions, because they have no use if they are consumed alone

Reason: The goods which are perfect complements are used together always. They have very less relevance when used individually. They complement each other perfectly and are usually used in fixed proportion.