CHAPTER 7: INCOME AND SUBSTITUTION EFFECTS IN CONSUMER GOODS MARKETS

Question 1

Change in income causes

Answer 1

Shifts in budgets

Question 2

Change in prices

Answer 2

Causes rotations in budgets

Question 3

Change in income and prices are

Answer 3

Changes in economic circumstances

Question 4

Change in income and prices (economic cirmumstances) may be caused due to

Answer 4

Market forces (supply and demand), or government policies (taxes, subsidies and regulations)

Question 5

Change in income for quasi linear goods

Answer 5

One good is unchanged, all additional income goes to the other

Question 6

MRS change for wuasilinear goods change in income

Answer 6

Unchanged vertically

Question 7

Income change - normal good

Answer 7

A good is normal if consumption moves in the same direction as income

Question 8

Income effect

Answer 8

Change in behaviour arising from a pure change in income

Question 9

Income effect - normal goods

Answer 9

Positive

Question 10

Income effect - inferior goods

Answer 10

Negative

Question 11

Income effect - quasi linear goods

Answer 11

Non-existant

Question 12

Income effects emerge from..
Have nothing to do with..

Answer 12

Relationship of indifference curves to one another and have nothing to do with the degree of substitutablily or shape of curves

Question 13

Quasilinear tastes equation

Answer 13

U(x1,x2) = v(x1)+x2

Question 14

When we have v(x1) we can solve for the optimal x1 as a function of only prices fo

Answer 14

X1, does not depend on income

Question 15

Income effect for homothetic tastes

Answer 15

Mrs remains constant along rays from the origin.

Increase in income = increase consumption by th same percent of change as the percent of change in income

Question 16

Homothetic goods = border between

Answer 16

Necessities = cosumption increase by less than percentage increase in income

And

Luxuries = consumption increase by more than the percentage increase in income

Question 17

All CES + Cobb Douglas are

Answer 17

Homothetic.
Consumer spends a constant fraction of income on each goods.

Question 18

X1 = equation

Answer 18

Alphaincome / p1

Question 19

Price of goods change causes

Answer 19

1) rate at which you can exchange one good for another
+
2) total purchasing power of income is altered
=
Total change in consumption

Question 20

1) and 2) occur

Answer 20

Simultaneously when a consumer faces a price change

Question 21

Substitution effect

Answer 21

The change in behaviour purely from the Change in opportunity costs with no change in “real income” (indifference curves)

• depends only on degree of substitutability.
• change in consumption when holding utility constsnt (sliding along a curve)

Question 22

Income effect

Answer 22

Change in consumption when jumptin from one indifference curve to another

Question 23

Size of substitution effect depends on the

Answer 23

Shape of a single indifference curve (degree of substitutability)

Little curvature = high degree of substitutability = large substitution effect.

Question 24

Price change for regular inferior goods

Answer 24

Income effect < substitution effect

When final budget lies between compensated budget and original budget

Question 25

Price change - giffen goods

Answer 25

Interior good with income effect > substitution effect Consumption increases as price increases, upwards sloping demand curve

Question 26

Price decrease substitution effect

Answer 26

Move from original budget to compensated budget

Question 27

Price decrease consumption + price move in

Answer 27

Opposite directions with the substitution effect.

Question 28

Price decrease, direction + magnitude of income effect say if

Answer 28

Normal, inferior of giffen good.

Question 29

Hicksian

Answer 29

How choices change when a price changes holding utility constant

Question 30

Slutsky

Answer 30

How choices change when a price changes holding your ability to purchase the original bundle constant.

Question 31

Smallest expenditure enabling customer to reach original utility at new price =

Answer 31

Compensated budget

Question 32

Minimum equation

Answer 32

MIN E X1,x2

Question 33

X2 equation

Answer 33

(1-alpha) I / p2

Question 34

Utility maximisation equation

Answer 34

MAX u(x1,x2) X1,x2

Question 35

Income effect moves from

Answer 35

B to c

Question 36

Compensation is positive when

Answer 36

P1 increases