TEST BANK FOR CHAPTER 3: Demand Curves

MULTIPLE CHOICE 1. Which of the following functional forms for utility suggests the greatest substitution effect when starting at the point where PX = PY a. U = min (X, Y) b. U = X + Y c. U = X1/2Y 1/2 d. U = X1/4Y 3/4 ANS: b 2. With only two goods, if the income effect is in the same direction as the substitution effect then the good is a. normal b. inferior but not Giffen c. Giffen d. There is not enough information to answer. ANS: a 3. With only two goods, if the income effect is in the opposite direction as the substitution effect but the substitution effect dominates then the good is a. normal b. inferior but not Giffen c. Giffen d. There is not enough information to answer. ANS: b 4. With only two goods, if the income effect is in the opposite direction as the substitution effect but the income effect dominates then the good is a. normal b. inferior but not Giffen c. Giffen d. There is not enough information to answer. ANS: c 5. Suppose a person’s utility is only a function of their consumption of diet soda and they do not care which brand, Diet Coke (DC) or Diet Pepsi (DP) they consume. Suppose further that PDC PDP. If PDC rises but it remains less than PDP then the consumption of DC a. Falls from a positive amount to zero b. Falls from a positive amount to another positive amount. c. rises. d. stays at zero. ANS: b 1 TEST BANK FOR CHAPTER 3 : DEMAND CURVES Chapter 3: Demand Curves 6. Suppose a person’s utility is only a function of their consumption of diet soda and they do not care which brand, Diet Coke (DC) or Diet Pepsi (DP) they consume. Suppose further that PDC PDP. If PDC rises to a point where PDC PDP then the consumption of DC a. Falls from a positive amount to zero b. Falls from a positive amount to another positive amount. c. rises. d. stays at zero. ANS: a 7. Suppose two goods coffee and creamer provide the consumer with utility but only if they are consumed in fixed proportions. An increase in the price of coffee will yield a. a substitution effect and an income effect in opposite directions. b. a substitution effect and an income effect in the same direction. c. a substitution effect but no income effect. d. an income effect but no substitution effect. ANS: d 8. Suppose you were to believe that “money illusion” exists that is as prices and incomes both rise proportionally, people buy more. Which of the following characteristics of demand does that cause you to doubt? a. demand functions are downward sloping b. demand has a positive vertical intercept c. demand has a positive horizontal intercept. d. demand functions are homogeneous of degree zero. ANS: d 9. Suppose there are two goods (X and Y). On a traditional graph of a budget line a tripling of all prices and incomes will a. alter the slope of the budget line only. b. alter the slope of the budget line as well as the Y-intercept. c. alter the slope of the budget line as well as the X-intercept. d. leave the budget line unaltered. ANS: d 10. The lump sum principle suggests that the tax that reduces utility the least is a. a tax on income b. a tax on a good with many substitutes c. an equal tax per-unit on all goods d. a tax on a good with only a few substitutes ANS: a 11. If a good is normal and its price increases, a. the income effect will be positive and the substitution effect will be positive. b. the income effect will be negative and the substitution effect will be negative. c. the income effect will be positive and the substitution effect will be negative. d. the income effect will be negative and the substitution effect will be positive. ANS: b 2 Chapter 3: Demand Curves 12. If a good is inferior and its price increases, a. the income effect will be positive and the substitution effect will be positive. b. the income effect will be negative and the substitution effect will be negative. c. the income effect will be positive and the substitution effect will be negative. d. the income effect will be negative and the substitution effect will be positive. ANS: c 13. If a good is Giffen and its price increases, a. the income effect will be positive and the substitution effect will be positive. b. the income effect will be negative and the substitution effect will be negative. c. the income effect will be positive and the substitution effect will be negative. d. the income effect will be negative and the substitution effect will be positive. ANS: c 14. If a good is normal and its price decreases, a. the income effect will be positive and the substitution effect will be positive. b. the income effect will be negative and the substitution effect will be negative. c. the income effect will be positive and the substitution effect will be negative. d. the income effect will be negative and the substitution effect will be positive. ANS: a 15. If a good is inferior and its price decreases, a. the income effect will be positive and the substitution effect will be positive. b. the income effect will be negative and the substitution effect will be negative. c. the income effect will be positive and the substitution effect will be negative. d. the income effect will be negative and the substitution effect will be positive