Consider the Indifference Curve Map and Budget Constraint for Two

question 10

Multiple Choice

Consider the indifference curve map and budget constraint for two goods, beef and potatoes. Suppose the good measured on the horizontal axis, potatoes, is a Giffen good. Beef is measured on the vertical axis and is a normal good. When the price of potatoes increases, the substitution effect causes

• A)an increase in the consumption of potatoes, and the income effect causes a decrease in the consumption of potatoes.The substitution effect is less than the income effect.
• B)a decrease in the consumption of potatoes, and the income effect causes an increase in the consumption of potatoes.The substitution effect is greater than the income effect.
• C)an increase in the consumption of potatoes, and the income effect causes a decrease in the consumption of potatoes.The substitution effect is greater than the income effect.
• D)a decrease in the consumption of potatoes, and the income effect causes an increase in the consumption of potatoes.The substitution effect is less than the income effect.

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Definitions:

Downward-Sloping Demand

A market condition where the quantity demanded of a good decreases as its price increases, adhering to the law of demand.

Barriers To Entry

Barriers to entry are obstacles that make it difficult for new competitors to enter an industry, protecting existing firms from competition and maintaining market power.

Monopolistic Competition

A market structure characterized by many firms selling products that are similar but not identical, allowing for competition based on factors other than price, such as quality and branding.

Price

The monetary value attached to acquiring a good or service.