Question

3A. Which of the following will increase the demand for a normal good?

A an increase in the price of a complement.

B a decrease in the number of customers.

C a decrease in income.

D a decrease in the price of the product.

E an increase in the price of a substitute.

3B Martha can spend $54 monthly on bagels and doughnuts. Consider the following two situations: (a) Initially (Situation A), when the price of a bagel is $3 and the price of a doughnut is $3, she buys 9 bagels and 9 doughnuts. (b) Later (Situation B), when the price of a bagel increases to $4 and the price of a doughnut decreases to $2, she buys 7 bagels and 13 doughnuts. Based on the information provided, we can conclude that

A Martha is equally well off in Situations A and B.

B Martha is better off in Situation B than in Situation A.

C Martha does not spend all of her monthly budget for bagels and doughnuts.

D we are not given enough information to determine an answer.

E Martha is better off in Situation A than in Situation B.

3C Which of the following would be expected to occur in the market for wool suits following a decrease in the price of wool?

A The supply of wool suits would increase.

B Both the supply of wool suits and the demand for wool suits would decrease.

C The supply of wool suits would decrease.

D The demand for wool suits would increase.

E The demand for wool suits would decrease.

3D If a consumer has $36 per day to spend on clothing, which has a unit price of $9, and on food, which has a unit price of $2, what would be the slope of the consumer’s budget line? (Assume that clothing is measured on the vertical axis (y axis), and food is measured on the horizontal axis (x axis) on the graph of the budget line.)

A 9/2

B -2/9

C 4

D 2/9

E -9/2

Answer 1

Ans. Option E

A normal good is the one whose

-demand increases with increase in income

-demand increases with fall in the price of the complementary good

-deamand increases with increase in price of the substitute good as with increase in price of the substitute good, people substitute this good with the relatively cheaper other good, increasing its demand.

Ans. Option D

Martha is spending all of her budget of $54 on the two goods in both the situations, but to assess whether she is equally, more or less satisfied in which situation, her utility function is required which is not given. So, it is not possible to comment on her satisfaction level.

Ans. Option A

Wool is an input to the production of wool, so, if the price of wool decreases, cost of production of woolen suits will decrease. So, profits of the suppliers will increase at the given price, making them to increase the supply of suits

Ans. Option b

Let amount of clothing consumed be C and amount of food consumed be F. Then,

Budget constraint, 9C + 2F = 36

Then the slope = dC/dF => 9*(dC/dF) + 2 = 0

=> dF/dC = -2/9