Question

 TRUE/FALSE/UNCERTAIN statements. Justify why.

The total effect of a price increase on its demand is smaller than the substitution effect

1. The government puts a price ceiling on the cost of a large pizza. Consumers will loose

from this policy

2. All goods, normal or inferior, satisfy the Law of Demand

Answer 1

Uncertain- Assuming the pizza market is perfectly competitive, there will be deadweight

loss to society. As part of this deadweight loss there will be less pizza produced and the

pizza that is produced so some consumers could have benefited from the existence of

more pizza and would have been willing to pay amount producers would have accepted

to produce it. However, there is also a transfer from producer’s profits to consumers

relative to the perfectly competitive outcome (consumers pay a lower price on all units).

Whether consumers benefit depends on the size of the transfer and the size of the

deadweight loss.

2)

question.> False – Giffen good are special inferior goods. These Giffen goods do not

satisfy the law of demand.