All Goods Are Inferior but Not All Inferior Are Giffen . Explain This Statement on the Basis of Income and Substitution

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All Goods Are Inferior but Not All Inferior Are Giffen . Explain This Statement on the Basis of Income and Substitution Powered By Docstoc
					Test1 Econ 321 Chappell September 24, 2001

Your Name:

Your Student Number:

True/False
Indicate whether the sentence or statement is true or false. On the green sheet, mark “1” for true and “2” for false.

____    1. An increase in the price of gasoline would shift the demand curve for gasoline to the left.
____    2. If the price and quantity exchanged of a good simultaneously rise, then the law of demand has been violated.
____    3. If all absolute prices increase by 10%, then the economy's relative prices will remain unchanged.
____    4. Along a convex indifference curve, the marginal value of a good rises as the quantity of the good rises.
____    5. The consumer's income has no effect of the slope of the consumer's budget line.
____    6. If the consumer's income and all prices simultaneously double, then his optimum will
           not change.
____    7. If the Consumer Price Index (CPI) reports an inflation rate of 0%, then a person with a fixed income will be
           neither better off or worse off.
____    8. In a two-good world, one good-but not both-can be inferior.
____    9. All Giffen goods must be inferior goods, but not all inferior goods are Giffen goods.
____ 10. If good wines can be produced in Turkey at costs lower than in the wine exporting countries, but the local
         population drinks little wine, then Turkey should not produce wine.
Multiple Choice
Identify the letter of the choice that best completes the statement or answers the question. On the green sheet, mark “1”
for “a” etc.

____ 11. Which of the following would cause the demand curve for peanuts to shift to the left?
         a. A rise in the price of peanuts.
         b. A blight that destroyed 75% of the peanut harvest.
         c. A report claiming that the high fat content of peanuts causes heart disease.
         d. A tariff that doubles the price of imported pistachio nuts.
____ 12. Suppose we observe that the price of gasoline has been rising, even though the quantity of gasoline sold has
         been falling. We can conclude that
         a. the law of supply does not hold for gasoline.
         b. the law of demand does not hold for gasoline.
         c. the demand for gasoline must have fallen.
         d. the supply of gasoline must have fallen.
____ 13. If the wages of loggers went up, the supply of logs would:
         a. fall, thereby shifting to the right.
         b. fall, thereby shifting to the left.
         c. rise, thereby shifting to the right.
         d. rise, thereby shifting to the left.
____ 14. The difference between an absolute price and a relative price is that:
         a. absolute prices are based on costs of production, relative prices are based on market
              exchange.
         b. absolute prices are in terms of currency, relative prices are in terms of another good.
         c. absolute prices are in terms of another good, relative prices are in terms of currency.
         d. absolute prices never change, relative prices change with inflation.
____ 15. If inflation causes the absolute prices of all commodities to double, then the relative prices
         a. will also double.
         b. will be halved.
         c. will be unchanged.
         d. may rise, fall, or remain unchanged.
____ 16. Suppose there are only two goods: food and clothing. What does it mean for the U.S. to have a comparative
         advantage in food production?
         a. The U.S. needs fewer resources to grow a given amount of food than do other nations.
         b. The U.S. sacrifices less clothing production to grow a given amount of food than do other
              nations.
         c. In the U.S., food production needs fewer resources than does a comparable amount of
              clothing production.
         d. In the U.S., food production costs less than does clothing production.
____ 17. An indifference curve shows the bundles of goods which
         a. have the same marginal values.
         b. the consumer can purchase, given his income and the prices he faces.
         c. are the most preferred of the baskets within his budget.
         d. are all equally desirable, providing the consumer with some fixed level of satisfaction.
____ 18. Under standard assumptions, which of the following is not a property of indifference curves?
         a. They are downward sloping and convex.
         b. They fill the plane and never cross.
         c. Their slope is equal, in magnitude, to the relative price of the goods.
         d. Baskets on indifference curves further away from the origin provide more satisfaction than
              those which are closer to the origin.
____ 19. If Odetta's marginal value of fish is $8 per pound, then
         a. Odetta will be indifferent if she trades 1 pound of fish for $8 worth of all other goods.
         b. Odetta thinks 1 pound of fish is worth $8, 2 pounds of fish are worth $16, and so forth.
         c. Odetta will not purchase any fish if the price is more than $8 per pound.
         d. Odetta must sacrifice $8 in currency for every pound of fish she chooses to purchase.
____ 20. Economists use the term normal good to refer to goods that
         a. you consume on a daily basis.
         b. you consume more of when your income falls.
         c. you consume more of when your income rises.
         d. consumers choose the same quantities of regardless of income.
____ 21. The set of income-quantity pairs showing the amount of a good the consumer buys at various levels of income
         is called
         a. a compensated demand curve.
         b. a budget line.
         c. an income-elasticity curve.
         d. an Engel curve.
____ 22. When the price of a good rises, the resulting change in quantity demanded due solely to the decline in your
         income's purchasing power is called the
         a. Giffen-good phenomenon.
         b. law of demand.
         c. substitution effect.
         d. income effect.
____ 23. Elasticity measures are preferred by economists to measures of slope when analyzing changes in the quantity
         of a good consumers purchase because
         a. they are harder to calculate.
         b. the measure of slope is dependent upon the units of measurement, elasticity is not.
         c. the measure of slope does not have any units of measurement, elasticity does.
         d. elasticity measures depend upon the type of currency, slope does not.
____ 24. The price elasticity of demand for apples is estimated to be -1.3, and the quantity demanded of apples is 3,000
         bushels per week. In this situation, a 4% rise in the price of apples would reduce the quantity demanded by
         a. 92 bushels per week.
         b. 120 bushels per week.
         c. 156 bushels per week.
         d. 975 bushels per week.
____ 25. Suppose the price of a commodity is $15 per unit. At that price, consumers wish to purchase 6,000 units
         weekly and producers wish to sell 4,000 units weekly. In this situation,
         a. unsatisfied consumers will bid up the market price.
         b. the market price will fall because producers are unsatisfied.
         c. the price will rise and the demand will fall to bring the market to equilibrium.
         d. supply will increase by 2,000 units in order to satisfy consumers.
Essays

Answer only 2 of the 3 questions.

         1. North Dakota has 300 acres of farmland; each acre can produce either 20 bushels of wheat or 10 bushels of
            corn. Iowa has 200 acres of farmland; each acre can produce either 20 bushels of wheat or 30 bushels of corn.

             (i)     What is the cost of growing a bushel of wheat in each state? What is the cost of growing
                     a bushel of corn in each state?
             (ii)    Suppose each state is self-sufficient and there is no trade. If each state chooses to
                     produce equal amounts of the two crops, how much wheat and corn will each state
                     produce?
             (iii)   If the two states begin to trade, with each specializing in its area of comparative
                     advantage, which state will produce wheat and which state will produce corn? How will
                     the total production between the two states compare to the situation where each was self-
                     sufficient?
         2. Suppose the price of cheese has recently risen from $4 to $6 per pound, while the price of fruit has fallen from
            $8 to $6 per pound. During this time, Miguel's income has stayed fixed at $48 per week. Before the price
            changes, Miguel had been buying 4 pounds of cheese and 4 pounds of fruit per week. Since the price changes,
            he has been buying 2 pounds of cheese and 6 pounds of fruit weekly. Assuming Miguel's preferences have not
            changed, is it possible to say whether the price changes have made Miguel better off or worse off? Explain.

         3. Suppose that a terrorist incident causes people to feel that air travel is more risky. Furthermore, because the
            government imposes new security requirements on airlines, production of air travel becomes more costly
            (without removing all of the added risk to travelers). Assume that the supply-demand model can be used to
            analyze impacts in the air travel market.

             (i)     Illustrate the impacts of the perception that air travel is more risky (momentarily ignoring
                     the cost increase). Which curve shifts (demand or supply), and in what direction?
             (ii)    Illustrate the impacts of the increase in costs of producing air travel (momentarily
                     ignoring the change in risk)? Which curve shifts (demand or supply), and in what
                     direction?
             (iii)   Now suppose that both effects are in effect (both risk and cost of production have risen).
                     What will be the impact on the price of air travel? on the quantity of air travel?
Test1_Econ321
Answer Section

TRUE/FALSE

      1.   F
      2.   F
      3.   T
      4.   F
      5.   T
      6.   T
      7.   F
      8.   T
      9.   T
     10.   F


MULTIPLE CHOICE

     11.   C
     12.   D
     13.   B
     14.   B
     15.   C
     16.   B
     17.   D
     18.   C
     19.   A
     20.   C
     21.   D
     22.   D
     23.   B
     24.   C
     25.   A


ESSAY

     26.
           (i)     One bushel of wheat costs 1/2 bushel of corn in North Dakota and costs 1 1/2 bushels of
                   corn in Iowa. One bushel of corn costs 2 bushels of wheat in North Dakota and costs 2/3
                   bushel of wheat in Iowa.
           (ii)    To get equal amounts of the two crops, North Dakota must use 1/3 of its farmland to
                   grow wheat and the other 2/3 to grow corn, giving it 2,000 bushels of wheat and 2,000
                   bushels of corn. Iowa must use 3/5 of its farmland to grow wheat and the other 2/5 to
                   grow corn, giving it 2,400 bushels of wheat and 2,400 bushels of corn.
           (iii)   North Dakota is the low-cost wheat producer and Iowa is the low-cost corn producer, so
                   North Dakota will produce 6,000 bushels of wheat and Iowa will produce 6,000 bushels
                                                                    s
            of corn. Total production has increased by 1,600 bushel of each crop over the situation
            where the two states were self-sufficient.
27. After the price changes, Miguel could still purchase 4 pounds of cheese and 4 pounds of fruit, because this
    basket still costs $48 under the new prices. Since Miguel chose not to continue purchasing this basket and
    instead chose to purchase a new basket, we can conclude that he must prefer having 2 pounds of cheese and 6
    pounds of fruit to having 4 pounds of each good. Therefore, the price changes have made Miguel better off.
    Alternatively, one can use a Laspeyres price index to show that Miguel is better off. In this situation, a
    Laspeyres price index would report no change in the cost of living (since 4 pounds of each good costs $48
    both before and after the price changes), so Miguel is better off since a Laspeyres price index makes price
    changes seem worse for consumers than they really are.

				
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