Lesson test: Income and substitution effects

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Income and substitution effects

1.[2p]
What does the Slutsky compensation give the consumer?

Enough income to afford the original bundle at the new prices

Correct

Enough income to reach the original indifference curve at the new prices

The answer is: Enough income to afford the original bundle at the new prices

Enough income to keep total spending on the good unchanged

The answer is: Enough income to afford the original bundle at the new prices

The same income as before, adjusted for inflation

The answer is: Enough income to afford the original bundle at the new prices

2.[3p]
A consumer with $u = \sqrt{x y}$ has income £120 and faces $p_{x} = 3$ , $p_{y} = 2$ . When $p_{x}$ rises to 6, what compensated income does the Slutsky method give them?

CorrectNot quite: 180

3.[3p]
In that same example, what is the size of the Slutsky substitution effect on $x$ , as a signed number?

CorrectNot quite: -5

4.[1p]
The substitution effect of a price rise is always negative.

True

Correct

False

The answer is: True

5.[3p]
A good has $x = 50$ , a compensated price response of $- 4$ units per pound, and $\partial x / \partial m = - 0.1$ . What is the total response $\partial x / \partial p_{x}$ ?

CorrectNot quite: 1

6.[3p]
What must be true for a good to be Giffen?

Select all that apply

It is inferior, so demand falls as income rises

Correct

It takes a large enough share of spending for the income effect to outweigh the substitution effect

Correct

Its substitution effect is positive

The answer is: It is inferior, so demand falls as income rises, It takes a large enough share of spending for the income effect to outweigh the substitution effect

Consumers must be irrational about it

The answer is: It is inferior, so demand falls as income rises, It takes a large enough share of spending for the income effect to outweigh the substitution effect

7.[3p]
What did Jensen and Miller find in their 2008 Chinese field experiment?

Subsidising rice reduced rice consumption among poorer Hunan households

Correct

Subsidising rice raised rice consumption in proportion to the subsidy

The answer is: Subsidising rice reduced rice consumption among poorer Hunan households

Subsidising wheat in Gansu produced the clearest Giffen response

The answer is: Subsidising rice reduced rice consumption among poorer Hunan households

The very poorest households showed the strongest Giffen behaviour

The answer is: Subsidising rice reduced rice consumption among poorer Hunan households

8.[3p]
Why does a revenue-neutral carbon tax with a lump-sum rebate still cut fuel use?

The rebate offsets the income effect but leaves relative prices, and so the substitution effect, unchanged

Correct

The rebate is too small to matter compared with the tax

The answer is: The rebate offsets the income effect but leaves relative prices, and so the substitution effect, unchanged

Fuel is an inferior good, so the income effect works the same way

The answer is: The rebate offsets the income effect but leaves relative prices, and so the substitution effect, unchanged

Lump-sum rebates change relative prices in the opposite direction

The answer is: The rebate offsets the income effect but leaves relative prices, and so the substitution effect, unchanged

9.[2p]
Match each good to the sign of its income effect for a typical household.

Restaurant meals
Bus travel
Own-brand instant coffee
Overseas holidays

inferior
inferior
normal
normal

Show the answer

Restaurant meals: normal Bus travel: inferior Own-brand instant coffee: inferior Overseas holidays: normal

1.[2p] What does the Slutsky compensation give the consumer?

2.[3p] A consumer with u=xy has income £120 and faces px=3, py=2. When px rises to 6, what compensated income does the Slutsky method give them?

3.[3p] In that same example, what is the size of the Slutsky substitution effect on x, as a signed number?

4.[1p] The substitution effect of a price rise is always negative.

5.[3p] A good has x=50, a compensated price response of −4 units per pound, and ∂x/∂m=−0.1. What is the total response ∂x/∂px?

6.[3p] What must be true for a good to be Giffen?

7.[3p] What did Jensen and Miller find in their 2008 Chinese field experiment?

8.[3p] Why does a revenue-neutral carbon tax with a lump-sum rebate still cut fuel use?

9.[2p] Match each good to the sign of its income effect for a typical household.

1.[2p]
What does the Slutsky compensation give the consumer?

2.[3p]
A consumer with $u = \sqrt{x y}$ has income £120 and faces $p_{x} = 3$ , $p_{y} = 2$ . When $p_{x}$ rises to 6, what compensated income does the Slutsky method give them?

3.[3p]
In that same example, what is the size of the Slutsky substitution effect on $x$ , as a signed number?

4.[1p]
The substitution effect of a price rise is always negative.

5.[3p]
A good has $x = 50$ , a compensated price response of $- 4$ units per pound, and $\partial x / \partial m = - 0.1$ . What is the total response $\partial x / \partial p_{x}$ ?

6.[3p]
What must be true for a good to be Giffen?

7.[3p]
What did Jensen and Miller find in their 2008 Chinese field experiment?

8.[3p]
Why does a revenue-neutral carbon tax with a lump-sum rebate still cut fuel use?

9.[2p]
Match each good to the sign of its income effect for a typical household.