A Consumer Price Index (CPI) adjustment overcompensates for inflation because it ignores A) the income effect when relative prices change. B) the substitution effect when relative prices change. C) that some goods are inferior. D) that the substitution effect may offset the income effect. ANSWER B
Date: September 9th, 2020
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 […]
Date: September 9th, 2020
When the price of a good changes, the income 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 […]
Date: September 9th, 2020
When measuring the substitution effect, one uses the change along A) the old indifference curve. B) the new indifference curve. C) either the old or the new indifference curve. D) the budget constraint. ANSWER A
Date: September 9th, 2020
Suppose Lisa spends all of her money on books and coffee. When the price of coffee decreases, the A) substitution effect on coffee is positive, and the income effect on coffee is positive. B) substitution effect on coffee is ambiguous, and the income effect on coffee is ambiguous. C) substitution effect on coffee is positive, […]
Date: September 9th, 2020
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 […]
Date: September 9th, 2020
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 […]
Date: September 9th, 2020
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 […]
Date: September 9th, 2020
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) […]
Date: September 9th, 2020
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 […]
Date: September 9th, 2020
