Use the following to answer questions 24-25: Andrew's utility function is U (x₁. x2) = x1x2. Every week he has 5 units of good 1 and 15 units of good 2 as endowment, and he can buy or sell good 1 at the price p1 = 1 and good 2 at the price of p2 =1 in the market. He does not have any other income source. Andrew regularly brings his endowment to market and trades to his optimal consumption bundle. One week, Andrew brought his usual endowment to market only to learn that the price of good 1 had increased to p₁ = 5, while the price of good 2 remained at p₂ = 1. 24. Which of the following statements is correct about the substitution effect due to this price change? The substitution effect decreases the demand for good 1 by 1 unit. A) B) The substitution effect decreases the demand for good 1 by 3 units. The substitution effect decreases the demand for good 1 by 6 units. The substitution effect increases the demand for good 2 by 10 units. The substitution effect increases the demand for good 2 by 20 units. 25. Which of the following statements is correct about the endowment income effect due to this price change? A) B) C) The endowment income effect increases the demand for good 1 by 2 units. The endowment income effect increases the demand for good 1 by 4 units. The endowment income effect increases the demand for good 1 by 10 units. The endowment income effect decreases the demand for good 2 by 10 units. The endowment income effect decreases the demand for good 2 by 15 units. D) E) D) E)
Use the following to answer questions 24-25: Andrew's utility function is U (x₁. x2) = x1x2. Every week he has 5 units of good 1 and 15 units of good 2 as endowment, and he can buy or sell good 1 at the price p1 = 1 and good 2 at the price of p2 =1 in the market. He does not have any other income source. Andrew regularly brings his endowment to market and trades to his optimal consumption bundle. One week, Andrew brought his usual endowment to market only to learn that the price of good 1 had increased to p₁ = 5, while the price of good 2 remained at p₂ = 1. 24. Which of the following statements is correct about the substitution effect due to this price change? The substitution effect decreases the demand for good 1 by 1 unit. A) B) The substitution effect decreases the demand for good 1 by 3 units. The substitution effect decreases the demand for good 1 by 6 units. The substitution effect increases the demand for good 2 by 10 units. The substitution effect increases the demand for good 2 by 20 units. 25. Which of the following statements is correct about the endowment income effect due to this price change? A) B) C) The endowment income effect increases the demand for good 1 by 2 units. The endowment income effect increases the demand for good 1 by 4 units. The endowment income effect increases the demand for good 1 by 10 units. The endowment income effect decreases the demand for good 2 by 10 units. The endowment income effect decreases the demand for good 2 by 15 units. D) E) D) E)
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:Use the following to answer questions 24-25:
Andrew's utility function is U (x₁, x2) = x1x2. Every week he has 5 units of good 1 and 15 units of good 2 as endowment,
and he can buy or sell good 1 at the price p1 = 1 and good 2 at the price of p2 =1 in the market. He does not have any
other income source. Andrew regularly brings his endowment to market and trades to his optimal consumption bundle.
One week, Andrew brought his usual endowment to market only to learn that the price of good 1 had increased to p₁ = 5,
while the price of good 2 remained at p₂ = 1.
24. Which of the following statements is correct about the substitution effect due to this price change?
The substitution effect decreases the demand for good 1 by 1 unit.
The substitution effect decreases the demand for good 1 by 3 units.
The substitution effect decreases the demand for good 1 by 6 units.
The substitution effect increases the demand for good 2 by 10 units.
The substitution effect increases the demand for good 2 by 20 units.
25. Which of the following statements is correct about the endowment income effect due to this price change?
The endowment income effect increases the demand for good 1 by 2 units.
A)
B)
C)
D)
E)
A)
B)
C)
D)
E)
The endowment income effect increases the demand for good 1 by 4 units.
The endowment income effect increases the demand for good 1 by 10 units.
The endowment income effect decreases the demand for good 2 by 10 units.
The endowment income effect decreases the demand for good 2 by 15 units.
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