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Econ203 Intermediate Microeconomics

Quiz 2

Answer all questions and submit in groups. (80 marks)

1. Graphically describe the substitution effect and income effect associated with a price decrease and increase when Good X and Good Y are a normal good. (20 marks)

2.  Graphically describe the substitution effect and income effect associated with a price decrease and increase when Good X is an inferior good and Good Y are a normal good. (20 marks)

3.  Graphically describe the substitution effect and income effect associated with a price decrease and increase when Good X is a Giffen good, and Good Y is a normal good.   (20 marks)

4. Explain graphically the difference between backward-bending Engel curve and income-consumption curve. (10 marks)

MC questions: (10 marks)  

1) As we move downward along a demand curve for apples,

A) consumer well-being decreases.

B) the marginal utility of apples decreases.

C) the marginal utility of apples increases.

D) Both A and B are true.

E) Both A and C are true.

2) Which of the following claims is true at each point along a price-consumption curve?

A) Utility is maximized but income is not all spent.

B) All income is spent, but utility is not maximized.

C) Utility is maximized, and all income is spent.

D) The level of utility is constant.

3) Which of the following is true regarding income along a price-consumption curve?  

A) Income is increasing.

B) Income is decreasing.   

C) Income is constant.  

D) The level of income depends on the level of utility.

4) If an Engel curve has a positive slope

A) both goods are normal.

B) the good on the horizontal axis is normal

C) as the price of the good on the horizontal axis increases, more of both goods in consumed.

D) as the price of the good on the vertical axis increases, more of the good on the horizontal axis is consumed.

5) When the income-consumption curve has a positive slope throughout its entire length, we can conclude that

A) both goods are inferior.

B) both goods are normal.

C) the good on the vertical (y) axis is inferior.

D) the good on the horizontal (x) axis is inferior.

6) Assume that beer is an inferior good.  If the price of beer falls, then the substitution effect results in the person buying ________ of the good and the income effect results in the person buying ________ of the good.

A) more, more     

B) more, less     

C) less, more     

D) less, less

7) The change in the quantity demanded of a good resulting from a change in relative price with the level of satisfaction held constant is called the ________ effect.

A) Giffen

B) real price

C) income

D) substitution

8) Which of the following describes the Giffen good case?  When the price of the good

A) rises, the income effect is opposite to and greater than the substitution effect, and consumption falls.

B) falls, the income effect is in the same direction as the substitution effect, and consumption rises.

C) falls, the income effect is in the opposite direction to the substitution effect, and consumption falls.

D) falls, the income effect is in opposite direction to the substitution effect and consumption rises.

E) Both A and D are correct.

9) The price of beef and quantity of beef traded are P and Q, respectively.  Given this information, consumer surplus is the area:

A) 0BCQ

B) ABC

C) ACP

D) CBP

E) 0ACQ

10) To determine whether an increase in the price of gasoline results in a consumer spending a larger share of their expenditure on gasoline we need to know

A) only how much money the consumer spends on gasoline before the price change

B) only the change in the price of gasoline

C) only the change in the price of gasoline as a percentage of the original price

D) only the own price elasticity of demand for gasoline

E) none of the above