Before an uneven rise in prices Allan consumed 5 bread and 6 juice. After the price increase and with an increased welfare payment from the government Allan consumes 4 bread and 7 juice. Does the government payment represent a true cost-of-living adjustment (COLA)? A) Yes, if the two consumption bundles lie on the same indifference […]
If the Engel curve for a good is upward sloping, the demand curve for that good must be downward sloping. Indicate whether the statement is true or false ANSWER True . If the Engel curve is upward sloping, the good is normal. As a result, the income effect will reinforce the substitution effect and […]
Which of the following is the geometric mean of 4 and 9? A) 6.5 B) 6 C) 36 D) 3.6 ANSWER B
Using a Paasche index to calculate the Consumer Price Index (CPI) A) weights quantities with current prices. B) weights prices with base-year quantities. C) weights quantities with base-year prices. D) weights prices with current year quantities. ANSWER D
A true cost-of-living adjustment (COLA) in response to a change in prices would compensate consumers so that they would be able to A) purchase the same bundle they purchased before prices changed. B) achieve the same level of utility they did before prices changed. C) face the same choices they did before prices changed. D) […]
Due to inflation, nominal prices are usually A) equal to real prices. B) smaller than real prices. C) larger than real prices. D) a constant proportion different from real prices. ANSWER C
If a consumer is compensated for the income effect that occurs when the price of a good increases, then his demand curves can never slope upward. Indicate whether the statement is true or false ANSWER True . The demand curve would only include the substitution effect. Even for Giffen goods, dq/dp is negative holding […]
The Consumer Price Index (CPI) measures inflation for every individual. A) True, the weights used in calculating the CPI are adjusted for every individual in the country. B) True, people all face the same prices and therefore face the same inflation. C) False, the CPI uses weights based on how much each product represents in […]
Many manufacturers sell products labeled as having imperfections at a discount at their factory outlets but do not ship these imperfect goods to regular retail outlets. Why? What will be an ideal response? ANSWER There is some substitutability between the goods, but imperfects sell for a lower price. Suppose, for example, the good sells […]
Richard receives government transfer payments and currently consumes 5 guns and 6 goose livers. Assume the price of guns decreases by 10% and the price of goose liver increases by 20%. The government raises Richard’s transfer payments so he can still afford 5 guns and 6 goose livers. Does this constitute a true cost-of-living adjustment […]
