QUESTION 4

For the following questions, state whether they are true, false or uncertain, Justify your answer using graphs where possible:

i.Suppose potatoes are a Giffen good. When the price of potatoes increases, both the substitution and the income effects cause the demand for potatoes to increase

ii.Sharon consumes only sodas (x) and pizza (y). Suppose that her preferences can be represented by U = min {x, y} , so sodas and pizza are perfect complements: Sharon wants to drink one soda for every pizza she eats. If the price of sodas increases, her demand for both sodas and pizzas will decrease, and all the change in demand will be due to the substitution effect

iii.Returns to scale for a firm are the same at all production levels

iv.A government sets a price ceiling for widgets that is below the equilibrium price. This intervention will always decrease the producer surplus, increase consumer surplus and decrease total surplus.

v.In the short run, perfectly competitive firms with higher fixed costs must also charge a higher price, all else equal.

vi.The short run marginal cost curve is always increasing due to the law of diminishing marginal returns