Part 1(45 points): Multiple Choice. 1.5 points per correct answer up to any 30.
ID: 1128154 • Letter: P
Question
Part 1(45 points): Multiple Choice. 1.5 points per correct answer up to any 30. Additional correct answers each earn 1 point extra credit. . If a good is normal with respect to income, which is true about the income and substitution effects of a price increase: a. Both decrcase quantity demanded of the good. b. Both increase quantity demanded of the good e. The income effect increases quantity demanded and the substitution effect decreases quantity demanded. d. The suhstitution effect increases quantity demanded and the income effect decreases quantity d e None of the above. novels is 4 dollars each and the he could afford 12 bunches of 2. Harry thrives on two goods, paperback novels and bananas. The cost of paperback cost of bananas is 3 dollars per bunch. If Harry spent all of his income on bananas, bananas per week. How many paperback novels could he buy if he spent all of his income on paperback novelsi a. 36 b. 48 d. 16 e. None of the above. 3. Isobel consumes positive quantities of both jam and juice. The price of jam is 5 cents per unit and the price of Juice is 10 cents per unit. Her marginal utility of jam is 3 and her marginal utility of juice is 6. a Without changing her total expenditures, she could increase her utility by consuming more jam and less juice. b. Without changing her total expenditures, she could increase her utility by consuming more juice and less jam. d. She should spend more money on both jam and juice e. We can't tell whether any of the other statements are true or false without knowing the quantities she consumes 4. If the price elasticity of demand for a good is greater than one in absolute terms, we say that demand is a. clastic b. inelastic e. perfect d. vertical 5. Charlie has the utility function U)X. His indifference curve passing through 8 apples and 10 bananas will also pass through the point where he consumes 5 apples and a. 12 bananas. b. 16 bananas. c. 20 bananas d. 24 bananas. e. 28 bananas.Explanation / Answer
First question is answered below
1.
Correct option: (a)
Reason: As price increases, income and substitution effect move in opposite direction. Substitution effect reduces demand by making other goods feel cheaper and income effect decreases real income of consumer due to price increase, thereby reducing demand.