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:

Average Fixed Costs

The total fixed costs divided by the quantity of output produced; they decrease as output increases.

Silk Flower Arrangements

Artificial floral displays made from silk or similar synthetic materials, often used as decorations.

Variable Cost

Costs that change in proportion to the level of activity or volume of goods produced in a business.

Marginal Cost

The increase in cost that arises from producing one additional unit of a good or service.