Question

What do we call a solution where your optimal bundle consists of only one good? a. Interior Solution b. Corner Solution c. Greedy Solution d. Transformation Solution (Hint: Think about what a necessity means) 5. Necessity goods are defined as a. having a negative cross-price elasticity b. having a negative demand elasticity c. having supply elasticity greater than 1 d. having income elasticity between 0 and 1 effect of a price 6. A Hicksian (compensated) demand curve shows us the pure change. a. Substitution b. Income c. Marshallian d. (None of the Above) # 7. Why does the consumer price index (CPI) overstate inflation a. Its estimates are known to be inaccurate b. It fails to account for income changes of consumers C. It fails to account for substitution effects between bundles d. It fails to measure the difference between working and retired consumers 8. Equivalent Variation is a. The amount of money we would give to a consumer to keep them indifferent about receiving a price change b. The amount of money we would have to take away to keep them indifferent between that and receiving a price change c. The amount of money needed by a consumer to obtain a certain utility d. The amount of money we would have to give a consumer to make them indifferent to taxation

Answer 1

Ans.4- (B)

A corner solution exists when a consumer consumes only one out of the two goods.

Ans.5-(D)

Necessary goods are those goods for which income elasticity has a value between 0 and 1.

Ans.6- (A)

A hicksian demand curve shows the pure substitution effect of a price change. On the other hand, a marshallian demand curve shows both income and substitution effect of a price change.

Ans.7- (C)

CPI overstates inflation due to substitution bias and quality bias.