PS1_SOL - PAM 200, Intermediate Microeconomics Problem Set...

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1 PAM 200, Intermediate Microeconomics Problem Set 1 Suggested Answers I. True, False or Uncertain. Explain . No credit given without explanation. Use graphs to help explain your answer whenever possible (3 points each). 1) If the income of car buyers rises, then the equilibrium price of cars will fall, and the equilibrium quantity of cars will rise. False. The direction of the shift in the demand curve for cars due to an increase in income depends on whether cars are a normal or an inferior good. If cars are a normal good, demand will shift to the right, causing an increase in both equilibrium price and quantity. If cars are an inferior good, then demand will shift to the left, causing a decrease in both equilibrium price and quantity. Because equilibrium price and quantity move together in either case, the statement is false. 2) If the income of consumers rises, then the demand curve for an inferior good will shift to the left. True. An inferior good is a good for which quantity demanded at any particular price decreases as income rises. Thus for any inferior good, demand will shift to the left as income rises. 3) If natural gas and firewood are substitute goods, and the price of natural gas rises, then the equilibrium price of firewood will also rise. True. If natural gas and firewood are substitutes for making heat, then as the price
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This note was uploaded on 11/14/2009 for the course PAM 2000 taught by Professor Evans,t. during the Spring '07 term at Cornell University (Engineering School).

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PS1_SOL - PAM 200, Intermediate Microeconomics Problem Set...

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