Meg compares combinations of Food (F) and Clothing (C) according to the followin
ID: 1255477 • Letter: M
Question
Meg compares combinations of Food (F) and Clothing (C) according to the following utility function:
u(C,F) = C F2
Initially, the price of one unit of Food is $1 and the price of one unit of clothing is $1 and Meg has an income of $21.
Question 18. Will Meg choose the combination Food=6, Clothing=16?.
a. Sure, it looks good to me!
b. No, because even though this combination is affordable to Meg, it doesn't exhaust
all her income.
c. No, because even though this combination is affordable to Meg, she would be better
off slightly increasing her consumption of food and reducing her consumption of
clothing.
d. No, because Meg cannot afford that combination of Food and Clothing..
e. No, because Meg sees Food and Clothing as perfect substitutes and therefore she will spend all her money either on Food or Clothing.
Question 19
Will Meg choose the combination Food=10.5, Clothing=10.5?
a. Sure, it still looks good to me!
b. No, because even though this combination is affordable to Meg, it doesn't exhaust
all her income.
c. No, because even though this combination is affordable to Meg, she would be
better off slightly increasing her consumption of food and reducing her
consumption of clothing.
d. No, because Meg cannot afford that combination of Food and Clothing..
e. No, because Meg sees Food and Clothing as perfect substitutes and therefore she
will spend all her money either on Food or Clothing.
Question 20
What combination of Food and Clothing will Meg choose?
a. Food=6, Clothing=16
b. Food=10.5, Clothing=10.5
c. Food=14, Clothing=7
d. Food=13.6, Clothing=7.4
e. Food=21, Clothing=0
Question 21 For Meg, Food is
a. A normal good
b. An inferior good
c. Has a zero income elasticity of demand
d. A Giffen Good
e. None of the above.
Question 22 For Meg, Food and Clothing:
a. are complements.
b. are substitutes.
c. have a zero cross-price elasticity of demand.
d. None of the above.
Question 23. Clothing becomes more expensive. In particular the price of clothing increases to $2. As a result of this price increase:
a. Meg is not worse off as she was spending all her money on food.
b. Meg is not worse off as she can still purchase his original combination (that is, what
she was purchasing before the price increase).
c. Meg will decrease her consumption of clothing and overall she is worse off with the price change.
d. Meg will decrease her consumption of food and overall she is worse off with the price change.
e. Meg will decrease her consumption of food and clothing and overall she is worse off with the price change.
Question 24. What will Meg choose if the price of clothing has increased to $2?
a. Food=6, Clothing=8
b. Food=10.5, Clothing=5.25
c. Food=14, Clothing=3.5
d. Food=15, Clothing=3
e. Food=21, Clothing=0
Question 24. Suppose that the price of clothing was temporary and prices have returned to their original level ($1 per unit of clothing and $1 per unit of food). Meg gets a gift (tax- exempt) of $21 in such a way that her income has doubled. She will now buy :
a. Food=12, Clothing=32
b. Food=21, Clothing=21
c. Food=28, Clothing=14
d. Food=27.2, Clothing=14.8
e. Food=42, Clothing=0
Question 25. An egalitarian government wants to tax Meg for her consumption of Food, effectively increasing the price for Food. The compensating variation is
a. The area under Meg's indifference curve and above the market price..
b. The area under Meg's indifference curve and above her budget line.
c. the minimum amount of income that the government needs to give to Meg in
order for her to agree to the tax.
d. the maximum amount of income that the government needs to give to Meg in order for her to agree to the tax.
e. None of the above.
Explanation / Answer
The answers are They're all correct. 18. d. 19. c. 20. c. 21. a. 22. c. 23. c. 24. c. 25. c. 25. c. Hope this helps