Download Practice Quiz 5

Chapter 5: Practice Quiz
Income and Substitution Effects
1.
If the prices of all goods increase by the same proportion as income, the quantity
demanded of good x will
a.
decrease.
b.
increase.
c.
remain unchanged.
d.
change in a way that cannot be determined from the information given.
2.
Demand functions are “homogeneous of degree zero in all prices and income.” This
means
a.
a proportional increase in all prices and income will leave quantities demanded
unchanged.
b.
a doubling of all prices will not alter consumption decisions.
c.
prices directly enter individuals’ utility functions.
d.
an increase in income will cause all quantities demanded to increase
proportionately.
3.
If income doubles and the quantity demanded of good x more than doubles, then good x
can be described as a
a.
substitute good.
b.
complement good.
c.
necessity.
d.
luxury.
4.
If an individual buys only two goods and these must be used in a fixed relationship with
one another (e.g., coffee and cream for a coffee drinker who never varies the amount of
cream used in each cup), then
a.
there is no substitution effect from a change in the price of coffee.
b.
there is no income effect from a change in the price of coffee.
c.
Giffen’s Paradox must occur if both coffee and cream are inferior goods.
d.
an increase in income will not affect cream purchases.
5.
Consider the two following statements:
I.
x is an inferior good.
II.
x exhibits Giffen’s Paradox.
Which of the following is true?
a.
I implies II, but II does not necessarily imply I.
b.
II implies I, but I does not necessarily imply II.
c.
I and II are statements of the same phenomenon.
d.
Neither statement implies the other.
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6.
Assume x and y are the only two goods a person consumes. If after a rise in pX the
quantity demanded of y increases, one could say
a.
the income effect dominates the substitution effect.
b.
the substitution effect dominates the income effect.
c.
it is still impossible to determine whether the substitution or income effect
dominates.
d.
none of the above.
7.
An individual’s demand curve
a.
represents the various quantities that a consumer is willing to purchase of a good
at various price levels.
b.
is derived from an individual’s indifference curve map.
c.
will shift if preferences, prices of other goods, or income change.
d.
all of the above.
8.
Which of the following will not cause a demand curve to shift position?
a.
A doubling of the good’s price
b.
A doubling of the price of a closely substitutable good
c.
A doubling of income
d.
A shift in preferences
e.
A doubling of both the price of x and the price of y
9.
A decrease in demand is represented by
a.
a shift outward of the entire demand curve.
b.
a shift inward of the entire demand curve.
c.
a movement along the demand curve in a southeasterly direction.
d.
a movement along the demand curve in a northwesterly direction.
10.
If the compensated and Marshallian demand curves for a good intersect, at that point the
Marshallian curve will be
a.
flatter if this is a normal good.
b.
steeper if this is a normal good.
c.
flatter if this is an inferior good.
d.
horizontal.
11.
Which of the following demand functions is not homogenous of degree zero in
px , py , and I?
a.
x = I / (px,+ py ).
x = I .5 p x0.3 p y0.2 .
b.
c.
d.
x  I p y / p 2x .
x = I p y/ p x .
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12.
Consider the following three concepts:
I.
Marshallian Demand [x = x(px, py , I)]
II.
Indirect Utility [V = g (px, py , I)]
III.
Compensated Demand [x = xc (px, py , U)]
Which of these functions is necessarily homogeneous of degree zero in its argument?
a.
All of them
b.
None of them
c.
Some of them
13.
The price elasticity of demand for good x is defined as
a.
percentage change in px / percentage change in x.
b.
percentage change in x /percentage change in px .
c.
percentage change in x/percentage change in income.
d.
percentage change in x /percentage change in py .
14.
The price elasticity of demand for a horizontal demand curve is
a.
0.
b.
–1.
c.
1.
d.
– infinity.
15.
The price elasticity of demand for a vertical demand curve is
a.
0.
b.
-1.
c.
1.
d.
- infinity.
16.
If the demand for a product is elastic, then a rise in price will
a.
cause total spending on the good to increase.
b.
cause total spending on the good to decrease.
c.
keep total spending the same, but reduce the quantity demanded.
d.
keep total spending the same, but increase the quantity demanded.
17.
The price elasticity of demand for a linear demand curve follows the pattern (moving
from high prices to low prices)
a.
elastic, unit elastic, inelastic.
b.
unit elastic, inelastic, elastic.
c.
inelastic, unit elastic, elastic.
d.
elastic, inelastic, unit elastic.
18.
If a consumer purchases only two goods (x and y) and the demand for x is elastic, then a
rise in the price of x
a.
will cause total spending on good y to rise.
b.
will cause total spending on good y to fall.
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c.
d.
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will cause total spending on good y to remain unchanged.
will have an indeterminate effect on total spending on good y.
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