For which of the following would the income effect of a price change be greatest?
a. ballpoint pens
b. air travel to Australia
c. chewing gum
d. haircuts
e. college textbooks
QUESTION 2Suppose there are only two goods, apples and oranges. What happens if the price of each good increases by 15 percent?
a. The consumer will substitute apples for oranges.
b. The consumer will substitute oranges for apples.
c. There is no substitution effect because relative prices have remained constant.
d. Demand for both goods increases.
e. Demand for both goods decreases.
QUESTION 3The law of demand is illustrated by a demand curve that is
a. horizontal
b. vertical
c. upward sloping
d. constant
e. downward sloping
QUESTION 4The substitution effect of a change in the price of bananas refers to the way in which a change in the
a. price of a substitute affects the demand for bananas
b. price of bananas affects the ability to buy them
c. relative price of bananas changes demand for them
d. relative price of bananas changes the quantity demanded of bananas
e. price of a substitute affects the quantity demanded of bananas
QUESTION 5Suppose you drink more tea because the price of coffee has increased. Which of the following best explains your action?
a. the law of supply
b. tea and coffee are complements
c. the substitution effect
d. the income effect
e. your nominal income has increased
QUESTION 6Which of the following statements about the substitution effect of a price change is true?
a. It is caused by a change in relative prices.
b. It affects the consumer's ability, rather than willingness, to purchase a good.
c. It assumes that the consumer substitutes more expensive goods for cheaper ones when income increases.
d. It is usually equal to the income effect.
e. It may cause the consumer to buy less of the good when its price falls.
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