ECO3600-01
Quiz #4 (10 points) NAME:__________________________________
True/False (1 point each)
___1) For a normal good, if the income effect is smaller than the substitution effect the demand
curve will be upward sloping.
___2) The substitution effect of a price change will result in the consumer buying more of a good
at a lower price if the good is normal and less of the good at a lower price if the good is inferior.
Multiple Choice (2 points each)
___3) When the price-consumption curve is (I suggest you draw this)
a) upward-sloping, total expenditures on other goods are decreasing as the price falls.
b) upward-sloping, total expenditures on the good are increasing as the price falls.
c) downward-sloping, total expenditures on other goods are decreasing as the price falls.
d) downward-sloping, total expenditures on the good are decreasing as the price falls.
___4) At every point on a demand curve, the height of the demand curve indicates
a) the height of the consumer.
b) the total benefit of the good to the consumer.
c) the maximum price the consumer is willing to pay for the good.
d) the consumer’s utility level.
Short Answer
1) Draw a diagram of an individual’s consumption decision between books (put it on the x-axis)
and movies (put it on the y-axis). (I suggest you draw this graph large, so you have room to do
part 2 on the same graph.)
(2 point)
2) On the same graph, show the effect of an increase in the price of books. Graphically
decompose the total change in desired consumption of books into the income and substitution
effects assuming that books are a normal good. (2 points)