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ECON 261 Study Guide - Final Guide: Giffen Good, Demand Curve, Normal Good

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yashtutor011
24 Jul 2020
School
ACU
Department
MGTS - Economics
Course
ECON 261
Professor
dona

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Document Summary

The following is intended to explore what kinds of own-price demand relationships are logically possible in a two-good model with exogenous income (unless otherwise specified). For each of the following, indicate whether the relationship is possible or not and explain: (a) tastes are homothetic and the own-price demand relationship is positive. When tastes are homothetic, all goods are normal goods. Price in creases for normal goods result in a negative substitution effect and a negative income effect in the same direction. Thus, the own-price demand relationship must be negative. (b) a good is inferior and its own-price relationship is negative. When a good is inferior, then an increase in the price results in a negative substitution effect and a positive income effect. Giffen good. ) (c) in a model with endogenous income, a good is normal and its own-price demand relationship is negative. Consider the case where all income is endogenously derived from owning a quantity e of x1.

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Related Questions

Consider the following statements about demand curves, normal and inferior goods, and substitution, income, and gross effects. Evaluate whether each statement is true or false, explaining why you reach this conclusion. (a) All inferior goods are Giffen goods. (b) All Giffen goods are inferior goods. (c) A good x that has a downward-sloping demand curve must be a normal good. (d) Any good x that has a downward-sloping demand curve must have a substitution effect that is larger in absolute value than the income effect (that is, |SE| > |IE|). (e) When Px falls, the substitution effect on x is larger in size if x is a normal good than if x is an inferior good.

1. If marginal utility is negative, total utility is

a. Positive

b. Negative

c. Decreasing

d. Constant

e. Increasing

2. If utility-maximizing consumers face identical prices, they will have identical

a. Marginal utilities for each good

b. Ratio of marginal utilities for each good

c. Preferences

d. Ratios of total utilities for each good

e. Total utilities for each good

3. The substitution effect

a. Always increases quantity demanded of a good whose relative price has fallen

b. Is opposite in sign to the income effect for all normal goods

c. Is opposite in sign to the income effect for all normal goods

d. May cause demand curves to be upward sloping

e. Is always dominated by the income effect for normal goods

4. Demand curves for normal goods slope downward because

a. The substitution effect of a price change is greater than the income effect

b. Substitution and income effects work in the same direction

c. The income effect is always greater than the substitution effect

d. The income effect is always less than the substitution effect

e. None of the above

5. The idea that a consumer derives less additional satisfaction from consuming successive units of a good is called

a. Diminishing consumer surplus

b. The paradox of value

c. Diminishing marginal utility

d. Diminishing total value of consumption

e. Diminishing total utility

15. (From Web Quiz) Which of the following statements is correct about the Income Effect (IE) and the Substitution Effect (SE) of a change in the price of Good X: a) If IE and SE work in the same direction, then X is an inferior good b) If IE and SE work in opposite directions, then X is a normal good c) If IE and SE work in opposite directions, then X could have downward-sloping demand * d) If IE and SE work in the same direction, then X could have upward-sloping demand e) All of a) through d) are incorrect.