Chapter 2: Demand Analysis
True/false questions
No. Knowledge Answe Explanation
r
50 SE and IE False Because with normal good, when the price decrease the Income
effect would be positive however, with an inferior good, the
income effect would be negative if the price decreases.
More general
Price decreases
Normal goods Inferior good Giffen good
SE + SE + SE +
IE + IE – IE –
(SE dominates IE) (IE dominates SE)
49 SE and IE True Because with both normal good and inferior good, when price
decreases, the Substitution effect would be positive
48 SE and IE True Substitution effect is the change in item’s consumption associated
with the change in relative price of the item, with purchasing power
hold constant.
47 SE and IE False Income effect is the change in item’s consumption associated with
the change in purchasing power/ real income, with the relative
price hold constant.
46 SE and IE True Income effect is the change in item’s consumption associated with
the change in purchasing power/ real income, with the relative
price hold constant.
45 SE and IE True Substitution effect is the change in item’s consumption associated
with the change in the relative price of item, with the purchasing
power/real income hold constant.
44
43
42
41 SE and IE False Because the value of Income effect is only positive when and only
the good is normal, not inferior.
40 SE and IE False Because if the good is Giffen good, the price’s increase would lead
to the increase in demand for good.
39
38 Demand Forecasting
37 Demand forecasting
36 True
35 Revealed False
preference
theory
34
33 Indifference True
Budget theory
32 Elasticity
31
30
29
28 SE and IE False When price increases, the Income effect would be negative
when the good is normal, and that number would be positive if
the good is inferior.
27 SE and IE False Whenever the price of the good increase, the Substitution effect
is always negative.
26 SE and IE False If the good is a giffen good, the the decrease in price would
lead to the decrease in the demand for that giffen good.
25
23 Demand
forecasting
22 Revealed False
preference
theory
21 Revealed False
preference
theory
18 Demand
forecasting
17 Demand
forecasting
16 Demand
forecasting
15 Demand True
characteristics
of good
14 Revealed True
preference
theory
13
12
11
10 Revealed True According to Revealed preference theory, we can isolate the SE
preference and IE when Substitution effect is equal to 0
theory
9 SE and IE False Income effect is the change in item’s consumption associated
with the change in the purchasing power/real income, with the
relative price hold constant.
8 SE and IE True Substitution effect is the change in the item’s consumption
associated with the change in relative price of the item, with the
income hold constant
7
Statements Knowledge Ans Explanation
50. With both SE and IE False When the price decreases, Substitution effect of both normal
normal good and good and inferior good is always positive. Income effect of
inferior good, when normal good is positive while that of inferior good is negative.
the price decreases, More specific, if the good is Giffen good, absolute value of IE
Income effect is dominates the absolute value of SE
always positive
Revealed preference theory
- Do not use indifference curve in analyzing
- Focus on consumer’s behavior not preference
- When consumer chooses a combination of good, he reveals that his preference for that
combination of goods rather than other combination
Assumptions:
- With nominal income and fixed prices of goods, consumer spend all money
- With a certain price and income, just choose one combination of goods
- Existing one and only price level and income for each combination of goods
- The decisions of consumer are consistent
Possible question here is: Can we surely isolate Substitution effect and Income effect in Revealed
preference theory?
We can isolate SE and IE when SE is equal to 0
Therefore, the statement “According to Revealed preference theory, when the price changes, we cannot
isolate SE and IE” is FALSE because we can isolate SE and IE when SE is equal to 0
The demand curve built from Revealed preference theory is a downward sloping curve and only reflect
Substitution effect.
Demand characteristics of goods
Consumers buy a good for the characteristics embodied in that good, and a good can possess more than
one characteristic
Characteristic frontier shows all combinations of different characteristics of goods that consumer can get.
Optimum point is the touching point between indifference curve and characteristic frontier