PLEASE PROVIDE STEP BY STEP AND EXPLAINATION 5A) Under what circumstances is the
ID: 1140783 • Letter: P
Question
PLEASE PROVIDE STEP BY STEP AND EXPLAINATION
5A)Under what circumstances is the demand curve upward-sloping? Ans C, please explain
a) When the good is an inferior good and the substitution effect outweighs the income effect. b) When the good is a normal good.c) When the good is an inferior good and the income effect outweighs the substitution effect. d) The demand curve can never be upward-sloping.
5B) Suppose when the price of good x decreases, the income effect is negative. What can we say? Ans C, please explain
a) Good x is a normal good.b) Good x is a Giffen good.c) Good x is an inferior good. d) none of the other answer
5C) Which of the following statements is false? Ans C, please explain
a) If the price of a good falls, the substitution effect will always induce the consumer to consume at least as
b) As the price of a normal good falls, the income effect will result in an increase in consumption of the good.
c) As the price of an inferior good increases, the income effect will induce the consumer to consume less of the good. much of the good as before the price change.
d) All Giffen good are inferior goods.
5D) Suppose that a consumer considers coffee and tea to be perfect substitutes, but he requires two cups of tea to give up one cup of coffee. This consumer’s budget constraint can be written as 3C + T = 10. What should the consumer buy? Ans D, please explain
a) 2 cups of tea and no coffee. b) 3 cups of coffee and no tea. c) 4 cups of coffee and no tea d) 10 cups of tea and no coffee
5E) Suppose that for all combinations of good x and good y, the marginal rate of subsitution of good x for good y is equal to twenty, MRSx,y = 20. What can we say about the consumer’s preferences for good x and good y? Ans D, please explain
a) The consumer views good x and good y as perfect substitutes. b) None of the other answers are correct. d) The consumer has diminishing marginal utility for at least one of the goods.
5F) Consider the following three market baskets. Ans C, please explain
Basket Good 1 Good2
A 2 8
B 10 2
C 6 5
a) The consumer is indifferent between Basket A and Basket C. b) Basket A is preferred to Basket C. c) There is not enough information to determine how the consumer would rank Basket A relative to Basket C. d) Basket C is preferred to Basket A.
5G) For a given utility function U(x,y) = xy, what happens to the indifference curve U(x,y) = 100 as the income increases from I = 10 to I = 20? Ans D, please explain
(a) Nothing.(b) None of the other answers are correct. (c) The indifference curve shifts to the Southwest. (d) The indifference curve shifts to the Northeast.
Explanation / Answer
5A.
when a good is inferior good whose income effect out weighs substitution effect, the good is called an Giffen good. For a Giffen good demand curve slopes wupwards.
consider a situation where you have subsistence level of income and consumes 2 commodities say bread and meat. meat is expensive that bread and hence it can be considered as a luxury good. let's consider a price increase for bread. this will lead to a fall in real income or disposible income. (fall in disposable income dur to price rice is called income effect, this will lead to a fall in demand). therefore the consumer can't afford the previous amounts of bread and meat. Therefore the consumre will buy less meat and to compensate for less meat he will purchase more bread. (substitutimg relatively cheaper commodity for expensive commodity represents substitution effect). thus the consumer will demand more of bread even when the price of bread increases. Here substitution effect outweigh incoem effect. therefore the fall demand due to fall in relative income is less than rise in quantity demanded due to substitution. therefore the demad curve slopes upwards.
5B. For an inferior good, a increse in income will lead to a fall in demand.
consider a consumer with a consumption bundle consisting of an inferior good and a normal good or a luxury good. when price of inferior good decrease, purchasing power will increse. that increase in real income due fall in price will lead to a change in demand (it is income effect). in this situation consumer will move to a higher budgtline due to rise in real income. he will reduce the consumption of inferior good and will purchase more of the other good.
5C. when price of inferior good increases, it will lead to a fall in relative income. in other words fall in purchasing power. with this lesser purchasing power the consumer can't maintain the previous consumption level. Therefore he will consumer more of inferior good. Thus fall in price leads to an increase in demand for an inferior good
5D. here coffee is 3 times costlier than tea. (from the budetlibe we can see the incme is 10. from the option d it is clear that the consumer spends 10 to get 10 units of tea therefore tea costs $1 and coffee $3). From the qustion we can understnad the consumer has a clear prefernce towarda tea.considering this prefrence and price we an assume that option d is correct
5E. marginal rate of substitution is nothing but the exchange rate between the two commodities. If the marginal rate og substitution takes the same value of 20 for all combinations of X and Y, then it implies equal preference. Equal preference indicates that the commodoties are perfecr substitutes.
5F. each of the bundles have different units of commodities X and Y. we can't say that A is prefered of B. because A has more of good 2 whereas B has more of good 1. similarly we cant identity preferred bundle among these 3 combinations with the given informations.
5G. when income increase consumer is abe to afford a higher consumption bundle. there the indifference curve will shoft to the right. that is towards the north - east direction
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