,TESTBANK FOR Microeconomic Theory Basic Principles & Extensions 13th
Edition Nicholson
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, Microeconomic Theory Basic Principles & Extensions 13th
Edition Nicholson
Test Bank
Special Topic 899: Chapter 01: Introduction
1. Indifference curves:
a. may sometimes intersect.
b. are contour lines only of a linear utility function.
✓ c. are convex if the utility function is quasi-concave.
d. shift when prices change.
2. For an individual who consumes only two goods, x and y, the opportunity cost of consuming
one more unit of x in terms of how much y must be given up is reflected by:
a. the individuals marginal rate of substitution.
✓ b. the market prices of x and y.
c. the slope of the individuals indifference curve.
d. none of these.
3. If bundles of goods A and B lie on the same indifference curve, one can assume:
a. the individual prefers bundle A to bundle B.
b. the individual prefers bundle B to bundle A.
✓ c. the individual enjoys bundle A and B equally.
d. bundle A contains the same goods as bundle B.
4. Exhibit 3.1. Consider an individual whose utility function is given by: . Refer to Exhibit 3.1.
With this utility function, the bundle (3,2) provides the same utility as the bundle:
a. (2, 3).
✓ b. (2, 4).
c. (2, 5).
d. (3, 3).
5. Exhibit 3.1. Consider an individual whose utility function is given by: . Refer to Exhibit 3.1. For
this utility function, the MRS:
a. depends on the values of x and y.
b. is always 0.
✓ c. is always 2.
d. is always 4.
6. Which of these utility functions represents the same preferences as ?
a.
b.
, c.
✓ d. All of the other choices represent the same preferences.
7. If utility is given by , then the persons MRS at the point x = 5, y = 2 is given by:
✓ a. 0.4.
b. 1.0.
c. 2.5.
d. 5.0.
8. If utility is given by , this persons indifference curves are:
a. parabolas.
b. hyperbolas.
c. concentric circles.
✓ d. straight lines.
9. Which of the following utility functions best represents the idea that two goods, x and y, are
perfect complements?
a.
b.
c.
✓ d.
10. If an individuals utility function is quasi-concave, their MRS will:
✓ a. diminish as x is substituted for y.
b. increase as x is substituted for y.
c. be undefined except in special cases.
d. always depend only on the ratio of x to y.
11. If utility is given by , then the bundle (3, 2) provides the same utility as the bundle:
a. (1, 3).
b. (2, 3).
✓ c. (4, 1).
d. (4, 2).
12. Which of the following utility functions would not be consistent with the notion that x and y
are both goods with positive marginal utilities?
a.
b.
c.
✓ d.
13. Exhibit 3.2. Consider the CES utility function given by: Refer to Exhibit 3.2. For this utility
function, marginal utilities are:
a. negative for < 0.
b. diminishing only for > 0.
c. increasing for > 0.
, ✓ d. always positive.
14. Exhibit 3.2. Consider the CES utility function given by: Refer to Exhibit 3.2. For this utility
function, smaller values for imply:
a. increasingly concave indifference curves.
✓ b. increasingly convex indifference curves.
c. indifference curves that are convex, linear, and then concave.
d. indifference curves that are concave, linear, and then convex.
1. If an individual is to maximize the utility received from consumption, they should spend all
available income. . . . This statement assumes:
✓ a. that saving is impossible.
b. that the individual is not satiated in any one good.
c. that no goods are inferior.
d. that every good has a positive marginal utility.
2. Suppose an individuals MRS (of steak for beer) is 2:1. That is, at the current consumption
choices, they are willing to give up 2 beers to get an extra steak. Suppose also that the price of
a steak is $1 and a beer is $4. Then in order to increase utility, the individual should:
✓ a. buy more steak and less beer.
b. buy more beer and less steak.
c. continue with current consumption plans.
d. buy less steak and less beer.
3. Suppose that at current consumption levels an individuals marginal utility of consuming an
extra hot dog is 10, whereas the marginal utility of consuming an extra soft drink is 2. Then the
MRS (of soft drinks for hot dogs)—that is, the number of hot dogs the individual is willing
to give up to get one more soft drink—is:
a. 5.
b. 2.
c. 1/2.
✓ d. 1/5.
4. If an individuals indifference curve map does not obey the assumption of a diminishing MRS,
then:
a. the individual will not maximize utility.
b. the individual will buy none of good x.
✓ c. tangencies of indifference curves to the budget constraint may not be points of utility
maximization.
d. the budget constraint cannot be tangent to an appropriate indifference curve.
5. An increase in an individuals income without changing relative prices will:
a. rotate the budget constraint about the x-axis.
b. shift the indifference curves outward.
✓ c. shift the budget constraint outward in a parallel way.
d. rotate the budget constraint about the y-axis.
,6. The slope of the budget constraint line is:
a. the ratio of the prices, (px / py).
✓ b. the negative of the ratio of the prices, (px / py).
c. the ratio of income divided by price of y, (I / py).
d. the ratio of the price of y divided by income, (py / I).
7. If the price of x falls, the budget constraint:
a. shifts outward in a parallel fashion.
b. shifts inward in a parallel fashion.
c. rotates outward about the x-intercept.
✓ d. rotates outward about the y-intercept.
8. Suppose that an individual has a constant MRS of shoes for sneakers of 4:3 (that is, they are
always willing to give up 3 pairs of sneakers to get 4 pairs of shoes). Then, if sneakers and
shoes are equally costly, they will:
✓ a. buy only sneakers.
b. buy only shoes.
c. spend their income equally on sneakers and shoes.
d. wear sneakers only 3/4 of the time.
9. If an individuals utility function is given by and I = 100, px = 1, py = 4, this individuals
preferred consumption bundle will be:
a. (20, 20).
✓ b. (50, 12.5).
c. (40, 15).
d. (30, 15).
10. If utility is given by and px = 2, py = 3, I = 50, this person will choose:
a. (10, 10).
b. (15, 6.67).
✓ c. (25, 0).
d. (0, 50/3).
11. If an individuals utility function for coffee (x) and cream (y) is given by , the demand function
for coffee is given by:
a. .
b. .
✓ c. .
d. .
12. Suppose utility is given by and px = 1, I = 10. If y must be purchased in whole units, what is
the maximum price this person would pay for that good?
a. 1
✓ b. 5
c. 10
, d. 20
13. An individual has a utility function for tennis rackets (x) and tennis balls (y) of the form .
Their expenditure function is given by:
✓ a. .
b. .
c. .
d. .
14. Exhibit 4.1. Assume that a person has a quasi-linear utility function of the form . Refer to
Exhibit 4.1. If px = 1, py = 2, I = 10, what is the utility maximizing commodity bundle?
✓ a. (8, 1)
b. (2, 4)
c. (1, 4.5)
d. (5, 2.5)
15. Exhibit 4.1. Assume that a person has a quasi-linear utility function of the form . Refer to
Exhibit 4.1. If this person starts from a utility maximizing position, an increase in income will
cause:
a. more of both goods to be bought.
b. more of only good y to be bought.
✓ c. more of only good x to be bought.
d. more x and less y to be bought.
1. If the prices of all goods increase by the same proportion as income, the quantity demanded
of good x will:
a. decrease.
b. increase.
✓ c. remain unchanged.
d. change in a way that cannot be determined from the information given.
2. Demand functions are homogeneous of degree zero in all prices and income. This means:
✓ a. a proportional increase in all prices and income will leave quantities demanded
unchanged.
b. a doubling of all prices will not alter consumption decisions.
c. prices directly enter individuals utility functions.
d. an increase in income will cause all quantities demanded to increase proportionately.
3. If income doubles and the quantity demanded of good x more than doubles, then good x can
be described as a:
a. substitute good.
b. complement good.
c. necessity.
✓ d. luxury.
,4. If an individual buys only two goods and these must be used in a fixed relationship with one
another (e.g., coffee and cream for a coffee drinker who never varies the amount of cream used
in each cup), then:
✓ a. there is no substitution effect from a change in the price of coffee.
b. there is no income effect from a change in the price of coffee.
c. Giffens Paradox must occur if both coffee and cream are inferior goods.
d. an increase in income will not affect cream purchases.
5. Consider the two following statements: I. x is an inferior good. II. x exhibits Giffens Paradox.
Which of the following is true?
a. I implies II, but II does not necessarily imply I.
✓ b. II implies I, but I does not necessarily imply II.
c. I and II are statements of the same phenomenon.
d. The two statements are unrelated.
6. Assume x and y are the only two goods a person consumes. If after a rise in px the quantity
demanded of y increases, one could say:
a. the income effect dominates the substitution effect.
✓ b. the substitution effect dominates the income effect.
c. it is still impossible to determine whether the substitution or income effect dominates.
d. the income effect and the substitution effect exactly offset.
7. An individuals demand curve:
a. represents the various quantities that a consumer is willing to purchase of a good at various price
levels.
b. is derived from an individuals indifference curve map.
c. will shift if preferences, prices of other goods, or income change.
✓ d. All of the other answers are correct.
8. Which of the following will not cause a demand curve to shift position?
✓ a. A doubling of the goods price
b. A doubling of the price of a closely substitutable good
c. A doubling of income
d. A shift in preferences
9. A decrease in demand is represented by:
a. a shift outward of the entire demand curve.
✓ b. a shift inward of the entire demand curve.
c. a movement along the demand curve in a southeasterly direction.
d. a movement along the demand curve in a northwesterly direction.
10. If the compensated (Hicks) and Marshall demand curves for a good intersect, at that point
the Marshall curve will be:
✓ a. flatter if this is a normal good.
b. steeper if this is a normal good.
c. flatter if this is an inferior good.
, d. horizontal.
11. Which of the following demand functions is not homogenous of degree zero in px, py, and I?
a.
b.
c.
✓ d.
12. Consider the following three concepts: I. Marshall Demand . II. Indirect Utility .III.
Compensated Demand . Which of these functions is(are) necessarily homogeneous of degree
zero in all its argument?
a. I, II, and III
b. None of I, II, or III
✓ c. Only I
d. I and III, but not II
13. The price elasticity of demand for good x is defined as:
a. percentage change in px / percentage change in x.
✓ b. percentage change in x / percentage change in px.
c. percentage change in x / percentage change in income.
d. percentage change in x / percentage change in py.
14. The price elasticity of demand for a horizontal demand curve is:
a. 0.
b. -1.
c. 1.
✓ d. - infinity.
15. The price elasticity of demand for a vertical demand curve is:
✓ a. 0.
b. -1.
c. 1.
d. - infinity.
16. If the demand for a product is elastic, then a rise in price will:
a. cause total spending on the good to increase.
✓ b. cause total spending on the good to decrease.
c. keep total spending the same but reduce the quantity demanded.
d. keep total spending the same but increase the quantity demanded.
17. The price elasticity of demand for a linear demand curve follows the pattern (moving from
high prices to low prices):
✓ a. elastic, unit elastic, and inelastic.
b. unit elastic, inelastic, and elastic.
c. inelastic, unit elastic, and elastic.
d. elastic, inelastic, and unit elastic.
, 18. If there are only two goods and these are consumed in fixed proportions, the price
elasticities of demand for these two goods will sum to:
a. 0.0.
b. -0.5.
✓ c. -1.0.
d. a number between 0 and -1.
19. If a consumer purchases only two goods (x and y) and the demand for x is elastic, then a
rise in the price of x:
✓ a. will cause total spending on good y to rise.
b. will cause total spending on good y to fall.
c. will cause total spending on good y to remain unchanged.
d. will have an indeterminate effect on total spending on good y.
20. Consider the linear demand curve . This demand curve will have a price elasticity of demand
of -1 when price is equal to:
a. a / b.
✓ b. a / 2b.
c. a / (a + b).
d. b / (a + b).
21. Here are three possible definitions of Compensating Variation: I. the amount a person would
be willing to pay to avoid a price increase. II. the amount of additional income needed to allow a
person to restore their utility back to its initial level after it has been reduced by a price
increase. III. the amount of income that a person who experienced a price increase would be
willing to pay to have the price return to its earlier level. Which of these definitions is (are)
correct?
a. Only I
✓ b. I and II
c. II and III
d. Only III
22. Often economists measure the loss in consumer surplus by looking at the changing area
below the Marshallian demand curve. This approach will provide a more accurate measure of
the compensating variation of such a price increase if:
✓ a. the good occupies a small portion of a persons budget.
b. the good occupies a large portion of a persons budget.
c. the good has many close substitutes.
d. the good has few substitutes.
1. If a rise in the price x causes less y to be demanded:
✓ a. x and y are gross complements.
b. x and y are gross substitutes.
c. x and y are net complements.
d. x and y are net substitutes.
Edition Nicholson
Important Notes
The file includes the complete test bank, organized chapter by chapter.
A sample of selected pages has been provided for preview.
All available appendices and Excel files (if included in the original resources) are
provided.
We continuously update our files to ensure you receive the latest and most accurate
editions.
New editions are added regularly – stay connected for updates!
⚠️Note on Answer Keys: If the answer key is not included within the chapter
questions, you will find the complete answers and solutions at the end of each
chapter.
✅ Why Buy From Us?
📚 Complete & organized chapter-by-chapter – no missing content, no guessing.
⚡ Instant digital delivery – get your file the moment you pay, no waiting.
📅 Always up to date – we track new editions so you always get the latest version.
💬 Friendly support – real humans ready to help, anytime you need us.
🔒 Safe & secure – thousands of satisfied students trust us every semester.
🛡️Our Guarantees
💰 Money-Back Guarantee: Not satisfied? We offer a full refund – no questions asked.
🔄 Wrong File? No Problem: Contact us and we will replace it immediately with the
correct version, free of charge.
⏰ 24/7 Support: We are always here – reach out anytime and expect a fast response.
Contact Email:
, Microeconomic Theory Basic Principles & Extensions 13th
Edition Nicholson
Test Bank
Special Topic 899: Chapter 01: Introduction
1. Indifference curves:
a. may sometimes intersect.
b. are contour lines only of a linear utility function.
✓ c. are convex if the utility function is quasi-concave.
d. shift when prices change.
2. For an individual who consumes only two goods, x and y, the opportunity cost of consuming
one more unit of x in terms of how much y must be given up is reflected by:
a. the individuals marginal rate of substitution.
✓ b. the market prices of x and y.
c. the slope of the individuals indifference curve.
d. none of these.
3. If bundles of goods A and B lie on the same indifference curve, one can assume:
a. the individual prefers bundle A to bundle B.
b. the individual prefers bundle B to bundle A.
✓ c. the individual enjoys bundle A and B equally.
d. bundle A contains the same goods as bundle B.
4. Exhibit 3.1. Consider an individual whose utility function is given by: . Refer to Exhibit 3.1.
With this utility function, the bundle (3,2) provides the same utility as the bundle:
a. (2, 3).
✓ b. (2, 4).
c. (2, 5).
d. (3, 3).
5. Exhibit 3.1. Consider an individual whose utility function is given by: . Refer to Exhibit 3.1. For
this utility function, the MRS:
a. depends on the values of x and y.
b. is always 0.
✓ c. is always 2.
d. is always 4.
6. Which of these utility functions represents the same preferences as ?
a.
b.
, c.
✓ d. All of the other choices represent the same preferences.
7. If utility is given by , then the persons MRS at the point x = 5, y = 2 is given by:
✓ a. 0.4.
b. 1.0.
c. 2.5.
d. 5.0.
8. If utility is given by , this persons indifference curves are:
a. parabolas.
b. hyperbolas.
c. concentric circles.
✓ d. straight lines.
9. Which of the following utility functions best represents the idea that two goods, x and y, are
perfect complements?
a.
b.
c.
✓ d.
10. If an individuals utility function is quasi-concave, their MRS will:
✓ a. diminish as x is substituted for y.
b. increase as x is substituted for y.
c. be undefined except in special cases.
d. always depend only on the ratio of x to y.
11. If utility is given by , then the bundle (3, 2) provides the same utility as the bundle:
a. (1, 3).
b. (2, 3).
✓ c. (4, 1).
d. (4, 2).
12. Which of the following utility functions would not be consistent with the notion that x and y
are both goods with positive marginal utilities?
a.
b.
c.
✓ d.
13. Exhibit 3.2. Consider the CES utility function given by: Refer to Exhibit 3.2. For this utility
function, marginal utilities are:
a. negative for < 0.
b. diminishing only for > 0.
c. increasing for > 0.
, ✓ d. always positive.
14. Exhibit 3.2. Consider the CES utility function given by: Refer to Exhibit 3.2. For this utility
function, smaller values for imply:
a. increasingly concave indifference curves.
✓ b. increasingly convex indifference curves.
c. indifference curves that are convex, linear, and then concave.
d. indifference curves that are concave, linear, and then convex.
1. If an individual is to maximize the utility received from consumption, they should spend all
available income. . . . This statement assumes:
✓ a. that saving is impossible.
b. that the individual is not satiated in any one good.
c. that no goods are inferior.
d. that every good has a positive marginal utility.
2. Suppose an individuals MRS (of steak for beer) is 2:1. That is, at the current consumption
choices, they are willing to give up 2 beers to get an extra steak. Suppose also that the price of
a steak is $1 and a beer is $4. Then in order to increase utility, the individual should:
✓ a. buy more steak and less beer.
b. buy more beer and less steak.
c. continue with current consumption plans.
d. buy less steak and less beer.
3. Suppose that at current consumption levels an individuals marginal utility of consuming an
extra hot dog is 10, whereas the marginal utility of consuming an extra soft drink is 2. Then the
MRS (of soft drinks for hot dogs)—that is, the number of hot dogs the individual is willing
to give up to get one more soft drink—is:
a. 5.
b. 2.
c. 1/2.
✓ d. 1/5.
4. If an individuals indifference curve map does not obey the assumption of a diminishing MRS,
then:
a. the individual will not maximize utility.
b. the individual will buy none of good x.
✓ c. tangencies of indifference curves to the budget constraint may not be points of utility
maximization.
d. the budget constraint cannot be tangent to an appropriate indifference curve.
5. An increase in an individuals income without changing relative prices will:
a. rotate the budget constraint about the x-axis.
b. shift the indifference curves outward.
✓ c. shift the budget constraint outward in a parallel way.
d. rotate the budget constraint about the y-axis.
,6. The slope of the budget constraint line is:
a. the ratio of the prices, (px / py).
✓ b. the negative of the ratio of the prices, (px / py).
c. the ratio of income divided by price of y, (I / py).
d. the ratio of the price of y divided by income, (py / I).
7. If the price of x falls, the budget constraint:
a. shifts outward in a parallel fashion.
b. shifts inward in a parallel fashion.
c. rotates outward about the x-intercept.
✓ d. rotates outward about the y-intercept.
8. Suppose that an individual has a constant MRS of shoes for sneakers of 4:3 (that is, they are
always willing to give up 3 pairs of sneakers to get 4 pairs of shoes). Then, if sneakers and
shoes are equally costly, they will:
✓ a. buy only sneakers.
b. buy only shoes.
c. spend their income equally on sneakers and shoes.
d. wear sneakers only 3/4 of the time.
9. If an individuals utility function is given by and I = 100, px = 1, py = 4, this individuals
preferred consumption bundle will be:
a. (20, 20).
✓ b. (50, 12.5).
c. (40, 15).
d. (30, 15).
10. If utility is given by and px = 2, py = 3, I = 50, this person will choose:
a. (10, 10).
b. (15, 6.67).
✓ c. (25, 0).
d. (0, 50/3).
11. If an individuals utility function for coffee (x) and cream (y) is given by , the demand function
for coffee is given by:
a. .
b. .
✓ c. .
d. .
12. Suppose utility is given by and px = 1, I = 10. If y must be purchased in whole units, what is
the maximum price this person would pay for that good?
a. 1
✓ b. 5
c. 10
, d. 20
13. An individual has a utility function for tennis rackets (x) and tennis balls (y) of the form .
Their expenditure function is given by:
✓ a. .
b. .
c. .
d. .
14. Exhibit 4.1. Assume that a person has a quasi-linear utility function of the form . Refer to
Exhibit 4.1. If px = 1, py = 2, I = 10, what is the utility maximizing commodity bundle?
✓ a. (8, 1)
b. (2, 4)
c. (1, 4.5)
d. (5, 2.5)
15. Exhibit 4.1. Assume that a person has a quasi-linear utility function of the form . Refer to
Exhibit 4.1. If this person starts from a utility maximizing position, an increase in income will
cause:
a. more of both goods to be bought.
b. more of only good y to be bought.
✓ c. more of only good x to be bought.
d. more x and less y to be bought.
1. If the prices of all goods increase by the same proportion as income, the quantity demanded
of good x will:
a. decrease.
b. increase.
✓ c. remain unchanged.
d. change in a way that cannot be determined from the information given.
2. Demand functions are homogeneous of degree zero in all prices and income. This means:
✓ a. a proportional increase in all prices and income will leave quantities demanded
unchanged.
b. a doubling of all prices will not alter consumption decisions.
c. prices directly enter individuals utility functions.
d. an increase in income will cause all quantities demanded to increase proportionately.
3. If income doubles and the quantity demanded of good x more than doubles, then good x can
be described as a:
a. substitute good.
b. complement good.
c. necessity.
✓ d. luxury.
,4. If an individual buys only two goods and these must be used in a fixed relationship with one
another (e.g., coffee and cream for a coffee drinker who never varies the amount of cream used
in each cup), then:
✓ a. there is no substitution effect from a change in the price of coffee.
b. there is no income effect from a change in the price of coffee.
c. Giffens Paradox must occur if both coffee and cream are inferior goods.
d. an increase in income will not affect cream purchases.
5. Consider the two following statements: I. x is an inferior good. II. x exhibits Giffens Paradox.
Which of the following is true?
a. I implies II, but II does not necessarily imply I.
✓ b. II implies I, but I does not necessarily imply II.
c. I and II are statements of the same phenomenon.
d. The two statements are unrelated.
6. Assume x and y are the only two goods a person consumes. If after a rise in px the quantity
demanded of y increases, one could say:
a. the income effect dominates the substitution effect.
✓ b. the substitution effect dominates the income effect.
c. it is still impossible to determine whether the substitution or income effect dominates.
d. the income effect and the substitution effect exactly offset.
7. An individuals demand curve:
a. represents the various quantities that a consumer is willing to purchase of a good at various price
levels.
b. is derived from an individuals indifference curve map.
c. will shift if preferences, prices of other goods, or income change.
✓ d. All of the other answers are correct.
8. Which of the following will not cause a demand curve to shift position?
✓ a. A doubling of the goods price
b. A doubling of the price of a closely substitutable good
c. A doubling of income
d. A shift in preferences
9. A decrease in demand is represented by:
a. a shift outward of the entire demand curve.
✓ b. a shift inward of the entire demand curve.
c. a movement along the demand curve in a southeasterly direction.
d. a movement along the demand curve in a northwesterly direction.
10. If the compensated (Hicks) and Marshall demand curves for a good intersect, at that point
the Marshall curve will be:
✓ a. flatter if this is a normal good.
b. steeper if this is a normal good.
c. flatter if this is an inferior good.
, d. horizontal.
11. Which of the following demand functions is not homogenous of degree zero in px, py, and I?
a.
b.
c.
✓ d.
12. Consider the following three concepts: I. Marshall Demand . II. Indirect Utility .III.
Compensated Demand . Which of these functions is(are) necessarily homogeneous of degree
zero in all its argument?
a. I, II, and III
b. None of I, II, or III
✓ c. Only I
d. I and III, but not II
13. The price elasticity of demand for good x is defined as:
a. percentage change in px / percentage change in x.
✓ b. percentage change in x / percentage change in px.
c. percentage change in x / percentage change in income.
d. percentage change in x / percentage change in py.
14. The price elasticity of demand for a horizontal demand curve is:
a. 0.
b. -1.
c. 1.
✓ d. - infinity.
15. The price elasticity of demand for a vertical demand curve is:
✓ a. 0.
b. -1.
c. 1.
d. - infinity.
16. If the demand for a product is elastic, then a rise in price will:
a. cause total spending on the good to increase.
✓ b. cause total spending on the good to decrease.
c. keep total spending the same but reduce the quantity demanded.
d. keep total spending the same but increase the quantity demanded.
17. The price elasticity of demand for a linear demand curve follows the pattern (moving from
high prices to low prices):
✓ a. elastic, unit elastic, and inelastic.
b. unit elastic, inelastic, and elastic.
c. inelastic, unit elastic, and elastic.
d. elastic, inelastic, and unit elastic.
, 18. If there are only two goods and these are consumed in fixed proportions, the price
elasticities of demand for these two goods will sum to:
a. 0.0.
b. -0.5.
✓ c. -1.0.
d. a number between 0 and -1.
19. If a consumer purchases only two goods (x and y) and the demand for x is elastic, then a
rise in the price of x:
✓ a. will cause total spending on good y to rise.
b. will cause total spending on good y to fall.
c. will cause total spending on good y to remain unchanged.
d. will have an indeterminate effect on total spending on good y.
20. Consider the linear demand curve . This demand curve will have a price elasticity of demand
of -1 when price is equal to:
a. a / b.
✓ b. a / 2b.
c. a / (a + b).
d. b / (a + b).
21. Here are three possible definitions of Compensating Variation: I. the amount a person would
be willing to pay to avoid a price increase. II. the amount of additional income needed to allow a
person to restore their utility back to its initial level after it has been reduced by a price
increase. III. the amount of income that a person who experienced a price increase would be
willing to pay to have the price return to its earlier level. Which of these definitions is (are)
correct?
a. Only I
✓ b. I and II
c. II and III
d. Only III
22. Often economists measure the loss in consumer surplus by looking at the changing area
below the Marshallian demand curve. This approach will provide a more accurate measure of
the compensating variation of such a price increase if:
✓ a. the good occupies a small portion of a persons budget.
b. the good occupies a large portion of a persons budget.
c. the good has many close substitutes.
d. the good has few substitutes.
1. If a rise in the price x causes less y to be demanded:
✓ a. x and y are gross complements.
b. x and y are gross substitutes.
c. x and y are net complements.
d. x and y are net substitutes.
