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
What is the primary difference between the substitution and the income effect of a price change? A) The substitution effect holds income constant and the income effect holds utility constant. B) The substitution effect is always positive and the income effect is always negative. C) The substitution effect holds utility constant and the income effect […]
The Affordable Care Act is intended to reduce the price of health care. A decrease in the price of health care may A) increase the number of doctors office visits if office visits are considered an inferior good and the substitution effect dominates the income effect. B) decrease the number of doctors office visits if […]
Median household income is $50,000 per year. The typical household spends about $125 per year on milk, which has an income elasticity of about 0.07. From this information, we can conclude that A) milk is a luxury. B) milk is a Giffen good. C) the income effect from a change in the price of milk […]
What is the benefit of understanding the income and the substitution effects? A) The income effect might run in the opposite direction of the substitution effect. B) The income effect always runs in the opposite direction of the substitution effect. C) The income and substitution effects just offset each other, which explains a lot. D) […]
When the price of a good changes, the substitution effect can be found by comparing the equilibrium quantities purchased A) on the old budget line and the new budget line. B) on the original indifference curve when faced with the original prices and when faced with the new prices. C) on the new budget line […]
The substitution effect can be measured holding ________ constant. A) income B) utility C) the price of one good D) the price of all goods ANSWER B
If a good is considered a normal good, the demand curve will shift ________ when income increases because ________. A) right; the income and substitution effects move in the same direction. B) right; the income and substitution effects move in the opposite direction. C) left; the income and substitution effects move in the same direction. […]
In the case of a normal good, A) demand curves always slope downward. B) the income effect and substitution effect are in the same direction. C) the Engel curve slopes upward. D) All of the above. ANSWER D
