Question

7. How much must Dave eam so that he is no worse off from the increase in jelly prices to $0.15? a. $3.30 b. $3.05 c. $3.15 d. $3.45 e. $3.75 8. 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=xy d) U=x"y 9. If the income effect is in the same direction as the substitution effect then the good a) Normal b) Inferior but not Giffen c) Giffen d) There is not enough information to answer. 10. 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.

Answer 1

Ans.8- (B)

If U=X+Y then consumer will always buy the cheapest good.

When Px=Py he can buy any amount of the two goods . But when Px and Py become different he will buy only that good which is cheaper.

Ans.9- (A)

For a normal good income effect and substitution effects reinforce each other.

Ans.10- (B)

In the case of an inferior good both income and substitution effects are in opposite direction.

Substitution effect dominates the income effect only in the case of inferior goods. Note that some inferior goods are giffen . Not all inferior goods are giffen

Question 7 can't be answered because its based on some previous question.