Question

1. John’s demand function of good 1 is Q1 = 20 + p2. p1 is the price of good 1, p1and p2 is the price of good 2. Which one of the following statements is correct?

A. Good 2 is a substitute of good 1
B. Good 2 is a complement of good 1
C. Good 1 does not obey law of downward-sloping demand

D. The price of good 2 has no effect on the demand of good 1

2. Let I be the income of the consumer, px be the price of good x (on the horizontal axis) and py be the price of good y (on the vertical axis). Then the value of the horizontal axis can be described by

A. I py

B. I px

C. py px

D. px py

3. Ann prefers good A to good B and good C to good D. If her preference is transitive, and B and C are on the same indifference curve. She must

A. prefer A to D
B. prefer D to A
C. indifferent between A and C

D. indifferent between B and D

Answer 1

Answer 1:

Option A.As price of good 2 is increasing, the quantity demanded of good 1 is increasing, thus both good 1 and good 2 are substitute goods.

Answer 2;

Option B. The horizontal intercept in the equation is fiven as I / px. or Total Income/ Price of Good X.

Answer 3;

Option A. Since consumer is indifferent between B and C and prefers A to B and C to D, this means that for preferences to be transitive, the consumer must prefer A to D.