Answer to Question #265193 in Microeconomics for umair

Question

State whether each of the following is true, false or uncertain and explain why.

a) If a good is a normal good. then the substitution effect and the income effect are of the same sign.

b) If a consurner has Cobb-Douglas preferences, it is possible for one of the goods to be a Giffen good.

c) If a consumer has quasi-linear preferences over two goods, then her consumption of neither good depends on her level of income.

Answer 1

a)The statement is true. consumers tend to substitute cheaper goods with more expensive ones if their income is high hence the two effects always seem to work in the same direction

b) The statement is uncertain. Giffen goods are non-luxury items which generate higher demand when prices rise therefore it may be possible or otherwise to appear in a consumer with Cobb- Douglas preferences.

c) The statement is false. With quasi-linear preferences, price will determine the quantity of good 1 consumed then income left over will determine the quantity of good 2 consumed.