Question 1

Suppose a consumer has an endowment of two goods and can buy or sell either in the market. If the price of good 1 increases, what happens to the consumer's budget line?

Accepted Answer

The budget line pivots around the endowment point, becoming steeper.

Question 2

Which of the following best describes the Slutsky equation in the context of buying and selling with endowments?

Accepted Answer

It decomposes the total effect of a price change into substitution, ordinary income, and endowment income effects.

Question 3

If a consumer is a net seller of good 1 and the price of good 1 increases, what is the likely impact on their utility?

Accepted Answer

The consumer is likely to be better off.

Question 4

Consider a Giffen good. What happens to the quantity demanded when its price decreases?

Accepted Answer

Quantity demanded decreases because the negative income effect outweighs the substitution effect.

Question 5

Given the Slutsky equation for discrete changes: $$\Delta x_1$ = \Delta x_1$^s + \Delta x_1$^m$$, what does $$\Delta x_1$^s$$ represent?

Accepted Answer

The change in demand for good 1 due to the substitution effect.

Question 6

A consumer starts as a net buyer of good 2. After a price change, she becomes a net seller of good 2. What can we say about her welfare?

Accepted Answer

We cannot say for sure; it depends on her preferences and the magnitude of the price change.

Question 7

Which of the following is true for a normal good when its price decreases?

Accepted Answer

Both the substitution and income effects increase quantity demanded.

Question 8

If a consumer's endowment of good 1 decreases, holding prices constant, what happens to her budget line?

Accepted Answer

The budget line shifts inward, reducing feasible consumption bundles.

Question 9

Suppose the gross demand for good 1 is $$x_1$$($$p_1$$, m)$$ and the endowment is w_1$. What is the net demand for good 1?

Accepted Answer

$$x_1$$($$p_1$$, m) - $$w_1$$

Question 10

Which of the following statements is correct regarding the income effect in the context of endowments?

Accepted Answer

A change in the price of a good you are selling changes your money income, affecting the budget line.

Question 11

A consumer faces the following budget constraint: $$p_1$$ $$x_1$$ + $$p_2$$ $$x_2$$ = $$p_1$$ $$w_1$$ + $$p_2$$ $$w_2. $$What does $$w_1$$ represent?

Accepted Answer

The consumer's endowment of good 1.

Question 12

If a consumer is a net buyer of good 1 and the price of good 1 falls, what is the likely impact on her utility?

Accepted Answer

She is likely to be better off.

Question 13

Which of the following best describes the difference between gross and net demand?

Accepted Answer

Gross demand is total desired consumption; net demand is gross demand minus endowment.

Question 14

In the Slutsky equation, what does the term $$\frac{\partial x_1$}{\partial p_1$}$$ represent?

Accepted Answer

The total effect of a change in the price of good 1 on its demand.

Question 15

Suppose a consumer sells some of her endowment of good 2 to buy good 1. If the price of good 2 increases, what happens to her ability to buy good 1?

Accepted Answer

Her ability to buy good 1 increases because her income from selling good 2 rises.

Question 16

Which scenario best illustrates the endowment income effect?

Accepted Answer

A farmer who owns wheat benefits when the price of wheat rises, even if she does not change her consumption.

Question 17

If the substitution effect for a price decrease in good 1 is $$+3$$ units and the income effect is $$-5$$ units, what is the total effect?

Accepted Answer

$$-2$$ units

Question 18

Which of the following is true for an ordinary inferior good when its price decreases?

Accepted Answer

The substitution effect increases quantity demanded, but the income effect decreases it.

Question 19

A consumer's budget constraint is $$p_1$$ $$x_1$$ + $$p_2$$ $$x_2$$ = $$p_1$$ $$w_1$$ + $$p_2$$ $$w_2. If $$she chooses not to buy or sell any goods, what is her consumption bundle?

Accepted Answer

$$(x_1$, x_2$) = (w_1$, w_2$)$$

Consumer Theory: Buying and Selling, Endowments, and the Slutsky Equation

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