Suppose That Consumers' Preferences Are Well Behaved in That Properties

question 128

Multiple Choice

Suppose that consumers' preferences are well behaved in that properties 4-1 - 4-4 are satisfied.Furthermore, assume that X is a normal good, Y is an inferior good and that the price of good Y decreases.Then, which of the following effect is known with certainty.

• A)the income and substitution effect reinforce one another leading to an overall decrease in the consumption of good X.
• B)the income and substitution effect will have competing effects leading to an indeterminate impact on the consumption of good Y.
• C)the income and substitution effect will reinforce one another leading to an overall increase in the consumption of good Y.
• D)the income and substitution effect will reinforce one another leading to an overall decrease in the consumption of good Y.
• E)the income and substitution effect will reinforce one another leading to an overall increase in the consumption of good X.

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Definitions:

Quasilinear Utility

A utility function where the utility is linear in one argument, typically representing money, allowing for the analysis of changes in wealth without the utility of wealth itself changing.

Consumption Increase

A rise in the amount of goods and services consumed by households or the economy over a period.

Price Increase

A rise in the cost of goods or services, affecting demand, supply, and inflation.

Optimal Consumption

The mix of goods and services that maximizes a consumer's utility given their budget constraints.