Question

9. Consider a consumer buying perfect complements. If there is a decrease in the price of good 1, the total change in consumption of good 1 is due to

a. the pure substitution effect

b. the income effect

c. the pure substitution effect minus the income effect

d. it depends on whether the good is inferior or normal

e. none of the above

11. Assume that a consumer has well-behaved preferences. Following a price increase for good 1, we observe that a consumer increases the quantity demanded for good 1. From this, we know that

a. The pure substitution effect increases the consumption of good 1

b. Good 1 must be an inferior good.

c. The pure substitution effect and the income effect must reinforce one another

d. both a and c

e. none of the above

12. If a consumer has homothetic preferences (for two possible goods, good 1 and 2) we know that:

a. They spend a fixed proportion of their income on each good (for given prices)

b. at least one good is an inferior good

c. both goods must be normal

d. all changes in consumption are derived from the pure substitution effect (that is, there are no income effects)

e. none of the above

13.If a good is normal, then the law of demand must always hold.

a. True

b. False

Answer 1

9. Consider a consumer buying perfect complements. If there is a decrease in the price of good 1, the total change in consumption of good 1 is due to

b. the income effect

for the complementary goods the substitution effect is zero and the income effect and price effect are same because price effect is equal to substitution effect plus income effect. so when price decreases real income increase and the demand for complements will increase.  

11. Assume that a consumer has well-behaved preferences. Following a price increase for good 1, we observe that a consumer increases the quantity demanded for good 1. From this, we know that

b. Good 1 must be an inferior good.

for inferior goods there is positive relation between price and quantity demanded. when the price of a good increase if its quantity demanded increases that means the good is inferior good.

12. If a consumer has homothetic preferences (for two possible goods, good 1 and 2) we know that:

d. all changes in consumption are derived from the pure substitution effect (that is, there are no income effects)

if consumer have homothetic preferences than there will be no income effect

13.If a good is normal, then the law of demand must always hold.

a. True

the law of demand states that there is negative relation between price and quantity demanded as the price increases quantity demanded decrease vice versa. in case of normal goods with increase in price the demand for normal goods decreases. so the law of demand holds true for normal goods.