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practice4ak - Answers to Practice Problems for Midterm Econ...

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Answers to Practice Problems for Midterm University of California, Los Angeles 1. A consumer spends his entire budget on two goods: x and y . (a) True or false: an increase in the price of x will always lead the con- sumer to purchase less x . False: the overall change in demand for good x will depend on the type of good x is. If x is a Gi/en good, the negative substitution e/ect of the price increase will be outweighed by the positive income e/ect. A Gi/en good has demand that is increasing in price. (b) True or false: and increase in the price of x will always lead the consumer to purchase more y . False: if x and y are gross substitutes, the substitution e/ect out- weighs the income e/ect, and demand for y is increasing in the price of x . 2. Graphically explain the e/ect in the budget constraint of an increase in an individual±s income without a change in relative prices. Explain the impact on the quantity demanded of both goods. The budget line will shift parallel away from the origin when income in- creases and towards the origin when income decreases. The impact on the quantity demanded will depend on the type of good. If x is an in- ferior good, an increase in income decreases the quantity demanded, that is, @x @M < 0 . If x is a normal good, an increase in income increases the quantity demanded, that is, @x @M > 0 . 3. Explain the monotonicity and convexity axioms and their implications for
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practice4ak - Answers to Practice Problems for Midterm Econ...

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