Question

4A. When the price of normal good N increases, the amount of N consumed decreases. The part of the decrease in N consumption due to an increase in the relative price of N is

a the marginal rate of substitution

b the income effect.

c marginal utility.

d the substitution effect.

e the network externality effect.

4B Which of the following statements about a Giffen good is false?

A For a Giffen good, the income effect dominates the substitution effect.

B Researchers have found that quinine water is a Giffen good for rats.

C A Giffen good is an inferior good.

D For a Giffen good, the income effect and the substitution effect work in opposite directions.

E A Giffen good has a negatively sloped demand curve.

4C Floyd prefers pizza to hamburgers; he prefers hamburgers to tacos; and he prefers pizza to tacos. In addition, he prefers eating less tacos than eating more tacos. Based on the information provided, which assumption(s) is satisfied by Floyd?

A Desirability and Transitivity.

B Transitivity only.

c Desirability only.

D Neither Desirability nor Transitivity.

4D. As the price of good X increases from $10 to $16, the quantity demanded falls from 100 to 80. Based upon this information, we can conclude that the demand for X is

A positively sloped.

B of unitary elasticity.

C inelastic.

D elastic.

Answer 1

4A. Option (d).

The substitution effect refers to the change in the equation purchase of commodities corresponding to a change in the price of a commodity such that the relative price changes while real income remaining the same.

4B. Option (E)

Giffen goods are those goods whose demand rises as price rise and falls as price falls, hence has a upward sloping (positively sloped) demand curve. It defies standard theory of demand.

4C. Option (A).

Theory of Transitivity states that, if A is preferred to B and B is preferred to C then A is preferred to C (here, pizza is preferred to hamburgers and hamburger is preferred to tacos and pizza is preferred to tacos) . And theory of desirability states that one event can be more desirable than another ( in this case, eating less tacos is more desirable than eating more).

4D. Option (c)

E_d =% change in quantity demanded / % change in price

= (-) change in quantity / change in price * price / quantity

= (-) 20/6 * 10/100

= 1/3

= 0.3

Since, 0.3 is less than 1, demand for X is inelastic.