Assume standard preferences. Which of the following is true concerning the substitution effect of a decrease in price? TOBRLT{Z&ly a. It always will lead to an increase in consumption. O b. It will lead to an increase in consumption only for a normal good. O It will lead to an increase in consumption only for an inferior good. O d. It will lead to an increase in consumption only for a Giffen good. Fowsd (units per mon ) Refer to the above figure. The effect of a decrease in the price of food, as depicted in the figure, leads us to believe that: 1DEBIRLTL =L, O a. food is an inferior good and clothing a Giffen good. O b. food is a Giffen good and clothing an inferior good. c. food is a Giffen good and clothing a normal good. I Suppose the price of beer increases and you view beer as an inferior good. The substitution effect results in a change in beer consumption, and the income effect leads to a change in beer consumption. 1DEIRLTLESL, O a. negative; negative () b. positive; negative O c. positive; positive d. negative; positive [Q4-Q] Consider the two-period inter-temporal consumption model (with perfectly competitive capital markets) we discussed in class. Assume that a consumer has standard preferences and that both current and future consumptions are normal. Answer the following questions, [Note: Borrowing means the difference between current consumption and current income.] Suppose the consumer is a borrower under a certain interest rate. Under a lower interest rate, she will 1DERLTZEW O a. borrow more. ) b. remain to be a borrower, but it is uncertain as to whether the borrowing will increase or decrease. U c. become a saver. O d. remain to be a borrower, but the borrowing will fall. Now remove the assumption, "both current and future consumptions are nermal\" (so one of them may be inferior). Again, suppose the consumer is a borrower under a certain interest rate. Under a lower interest rate, she will 1DERL T ZEW ) a become a saver. O b. borrow more. O remain to be a borrower, but it is uncertain as to whether the borrowing will increase or decrease. d. remain to be a borrower, but the borrowing will fall. Continuing from Question 2, which one of the following is true regarding the future consumption of the consumer when there is a fall in the interest rate? TDBRL T EEN U a. [ltincreases when future consumption is normal. O b. It decreases when future consumption is normal. U It decreases. O d. It decreases when future consumption is inferior. [Q7-Q9] Consider a consumer with a standard preferences and Px = 30 and Py = 20. Last year, he bought 2 units of Good X and 2 units of Good Y. This year, the price of Good X has decreased to Px = 20. With the same income, it turns out that he has bought 3 units of Good X and 2 units of Good Y. What is his income? [Note: Please just write a number. For example, if your answer is $100, then write 100, but not $100 or 100 dollars.] Which one of the following is true regarding the CV of the price change? O a. -$20 $0 O b. $0. O c. -$30. O d. EV