Suppose That Consumers' Preferences Are Well Behaved in That Properties

question 112

Multiple Choice

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

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

---

Definitions:

Fixed Expenses

Costs that do not change with the level of production or sales over the short term, such as rent, salaries, and insurance.

Break-even Point

The break-even point is the sales level at which total revenues equal total costs, resulting in neither profit nor loss.

Degree of Operating Leverage

A financial ratio that measures the sensitivity of a company's operating income to its sales volume, showing the impact of fixed costs on earnings.

Net Operating Income

A measure of a company's profitability, calculated by subtracting operating expenses from gross profit, not including non-operating income and expenses, interest, and taxes.