Answered: 10 . Consider a consumer with a…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

. Consider a consumer with a utility function U = x1 + x2. Initially, the consumer was only purchasing good 2, but after the price of good 1 was reduced, the consumer switched all of her consumption into good 1. The total change in consumption of good 1 is due to the pure substitution effect (and the income effect is zero).

True

False

12.

If a consumer has homothetic preferences (for two possible goods, good 1 and 2) we know that:

They spend a fixed proportion of their income on each good (for given prices)

O at least one good is an inferior good

both goods must be normal

all changes in consumption are derived from the pure substitution effect (that is, there are no income effects)

both a and c

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