Question

Barbara purchases only two goods, salads, and notepads. Both are normal goods for Barbara. Suppose the price of salad decreases. Barbara’s consumption of notepads will most likely

Select one:

a. be unchanged as the two goods are not substitutes.

b. increase due to the substitution effect.

c. decrease since she will spend more of her budget on salads

d. increase due to the income effect.

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2. There are only two brands of tennis balls Tom purchases: “Wilson” and “Penn.” The more he purchases of a ball, the lower the marginal utility of that ball. He spends all of his income and his marginal utility of a “Wilson” is 6 and his marginal utility of an “Penn” is 12. The price of a “Wilson” ball is $1 and the price of an “Penn” is $2. Which of the statements is true based on the above information?

Select one:

a. Tom would be willing to give up two “Penn” balls for one “Wilson” ball.

b. Tom can increase his satisfaction by doing nothing.

c. In equilibrium, Tom must give up three “Penn” balls for two “Wilson” balls.

d. Tom could increase his satisfaction by trading “Wilson” for “Penn.”

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3. Consider peanut butter as a normal good and answer the questions of what would happen if a decrease in income occurred?

Select one:

a. It would cause the quantity consumed of peanut butter to remain the same.

..b. The quantity of jelly consumed would also decrease.

c. It would cause the quantity consumed of peanut butter to increase.

d. It would cause the quantity consumed of peanut butter to decrease.

Answer 1

Barbara purchases only two goods, salads, and notepads. Both are normal goods for Barbara. Suppose the price of salad decreases. Barbara’s consumption of notepads will most likely

Select one:

a. be unchanged as the two goods are not substitutes.

b. increase due to the substitution effect.

c. decrease since she will spend more of her budget on salads

d. increase due to the income effect. - this is the right answer since a reduction in the price of one good would make her income 'go up as compared to what it was earlier in terms of the units of each good she can produce'

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2. There are only two brands of tennis balls Tom purchases: “Wilson” and “Penn.” The more he purchases of a ball, the lower the marginal utility of that ball. He spends all of his income and his marginal utility of a “Wilson” is 6 and his marginal utility of an “Penn” is 12. The price of a “Wilson” ball is $1 and the price of an “Penn” is $2. Which of the statements is true based on the above information?

Select one:

a. Tom would be willing to give up two “Penn” balls for one “Wilson” ball.

b. Tom can increase his satisfaction by doing nothing.- Since his MU/P is the same for both the brands, he is already in equilibrium and needs to do nothing.

c. In equilibrium, Tom must give up three “Penn” balls for two “Wilson” balls.

d. Tom could increase his satisfaction by trading “Wilson” for “Penn.”

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3. Consider peanut butter as a normal good and answer the questions of what would happen if a decrease in income occurred?

Select one:

a. It would cause the quantity consumed of peanut butter to remain the same.

..b. The quantity of jelly consumed would also decrease.

c. It would cause the quantity consumed of peanut butter to increase.

d. It would cause the quantity consumed of peanut butter to decrease. - This is the right answer (income effect)