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:

Debtor

An individual or entity that owes money or is under financial obligation to another, typically as a result of borrowing funds or purchasing goods/services on credit.

Collateral

Assets that are offered to secure a loan or other credit and that can be seized by the lender if the loan is unpaid.

Secured Parties

Creditors who have the right to seize collateral if a debtor fails to fulfill their obligation under a secured agreement.

Unsecured Creditors

Creditors who have extended credit without the protection of collateral, making their claims on a debtor’s assets secondary to those of secured creditors.