1. Law of equi-marginal utility says that a. marginal utility should be same fro
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Question
1. Law of equi-marginal utility says that
a. marginal utility should be same from all goods.
b. marginal utility of the last dollar spent should be same for all goods.
c. marginal utilities should be same as price ratio.
d. marginal rate of substitution should be same as price ratio.
2. If income elasticity is – 0.85 and incomes increases by 10%, then
a. quantity demanded will increase by 8.5%. It’s a normal good.
b. quantity demanded will decrease by 8.5%. It’s a normal good.
c. quantity demanded will decrease by 8.5%. It’s an inferior good.
d. quantity supplied will increase by 8.5%. It’s a normal good.
3. For a risk lover,
a. marginal utility from uncertain income is > marginal utility from certain income.
b. MRS is rising.
c. indifference curves are convex upwards.
d. equilibrium is a corner solution.
e. all the above.
4. Coffee and Tea are substitutes. Coffee and creamer are complements. Tea and creamer are unrelated. Then, a price increase in coffee should (it’s a hard question; think about it.)
a.decrease the quantity demanded of coffee and increase the quantity demanded of tea, but decrease the quantity demanded of creamer.
b.increase the quantity demanded of coffee and decrease the quantity demanded of tea, but increase the quantity demanded of creamer.
c.decrease the quantity demanded of coffee and increase the quantity demanded of tea, and also decrease the quantity demanded of creamer.
d.not change any demand curves; answer would really depend upon elasticities of demand.
5. For a consumer if price(s) increases, then
a. income subsidy is better than price subsidy because utility can be higher with income subsidy than with price subsidy.
b. income subsidy is based on providing the same basket of goods as price subsidy would have provided.
c. income subsidy is cheaper than the price subsidy.
d. Both a and b.
e. Both b and c.
Explanation / Answer
1. b. marginal utility of the last dollar spent should be same for all goods.
Law of equi-marginal utility states that a consumer will maximize his total utility when he allocates his income in such a way that the utility derived from last unit of money spent on each good is equal.
2. c. quantity demanded will decrease by 8.5%. It’s an inferior good.
Income Ed = % change in quantity demanded / % change in income
- 0.85 = % change in quantity demanded / 10
% change in quantity demanded = - 0.85 x 10 = - 8.5
3. a. marginal utility from uncertain income is > marginal utility from certain income.
Indifference curve of risk lover is concave towards the origin. MU from uncertain income is greater than the MU from certain income is the condition which is satisfied for risk lover.
4. c.decrease the quantity demanded of coffee and increase the quantity demanded of tea, and also decrease the quantity demanded of creamer.
Increase in price of coffee causes increase in quantity demanded of tea as consumer substitute coffee for tea. Increase in price of coffee decreases demand of creamer as these are complements of each other.
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