Income and substitution effect multiple choice questions with answers
challenging multiple-choice questions on income and substitution effects, and if you'd like more, please let me know. Here are the first 10 questions:
1. **Income Effect vs. Substitution Effect**:
Question: When the price of a normal good falls, what does the income effect represent?
a) An increase in the quantity demanded of the good.
b) A decrease in the quantity demanded of the good.
c) No change in the quantity demanded of the good.
d) An increase in consumer income.
Correct Answer: a) An increase in the quantity demanded of the good.
2. **Substitution Effect**:
Question: What does the substitution effect measure when the price of a good decreases?
a) The change in consumer income.
b) The change in consumer preferences.
c) The change in quantity demanded due to consumers switching to the cheaper good.
d) The change in quantity demanded due to increased consumer savings.
Correct Answer: c) The change in quantity demanded due to consumers switching to the cheaper good.
3. **Income Effect and Inferior Goods**:
Question: For an inferior good, what is the relationship between the income effect and the substitution effect when its price decreases?
a) The income effect reinforces the substitution effect.
b) The income effect opposes the substitution effect.
c) There is no income effect for inferior goods.
d) The income effect and the substitution effect cancel each other out.
Correct Answer: b) The income effect opposes the substitution effect.
4. **Normal vs. Inferior Goods**:
Question: If the price of a normal good increases, what happens to the income effect?
a) The income effect reinforces the substitution effect.
b) The income effect opposes the substitution effect.
c) There is no income effect for normal goods.
d) The income effect and the substitution effect cancel each other out.
Correct Answer: a) The income effect reinforces the substitution effect.
5. **Consumer Preferences and Substitution Effect**:
Question: When a consumer shifts their consumption from one good to another due to a relative price change, what effect are they primarily exhibiting?
a) Income effect.
b) Substitution effect.
c) Total effect.
d) Veblen effect.
Correct Answer: b) Substitution effect.
6. **Giffen Goods**:
Question: In the case of Giffen goods, what effect dominates when the price rises?
a) Substitution effect.
b) Income effect.
c) Total effect.
d) Neither effect dominates for Giffen goods.
Correct Answer: b) Income effect.
7. **Total Effect and Elasticity**:
Question: If the price of a good decreases, and the quantity demanded increases significantly, what does this suggest about the total effect?
a) The total effect is inelastic.
b) The total effect is elastic.
c) The total effect is dominated by the substitution effect.
d) The total effect is dominated by the income effect.
Correct Answer: d) The total effect is dominated by the income effect.
8. **Consumer Behavior and Elasticity**:
Question: Which of the following goods is more likely to exhibit a dominant income effect when the price rises?
a) A luxury good.
b) An inelastic good.
c) A necessity.
d) An elastic good.
Correct Answer: a) A luxury good.
9. **Normal vs. Inferior Goods**:
Question: If the price of a good decreases, and the quantity demanded increases, what does this suggest about the nature of the good?
a) It is a normal good.
b) It is an inferior good.
c) It is an elastic good.
d) It is a luxury good.
Correct Answer: a) It is a normal good.
10. **Consumer Preferences and Total Effect**:
Question: What is the total effect when the price of a good decreases, leading to an increase in quantity demanded, but the magnitude of the income effect is smaller than the substitution effect?
a) The total effect is positive.
b) The total effect is negative.
c) The total effect is zero.
d) The total effect is indeterminate.
Correct Answer: a) The total effect is positive
11. **Consumer Choices and Income Effect**:
Question: When the price of a normal good increases, what happens to the income effect?
a) The income effect reinforces the substitution effect.
b) The income effect opposes the substitution effect.
c) There is no income effect for normal goods.
d) The income effect and the substitution effect cancel each other out.
Correct Answer: b) The income effect opposes the substitution effect.
12. **Veblen Goods**:
Question: What effect is often associated with Veblen goods, where higher prices may actually increase demand?
a) Income effect.
b) Substitution effect.
c) Total effect.
d) Veblen effect.
Correct Answer: d) Veblen effect.
13. **Consumer Behavior and Elasticity**:
Question: Which of the following goods is more likely to exhibit a dominant substitution effect when the price rises?
a) A necessity.
b) An inelastic good.
c) A luxury good.
d) An elastic good.
Correct Answer: d) An elastic good.
14. **Price Changes and Total Effect**:
Question: If the price of a good increases, leading to a decrease in quantity demanded, and the magnitude of the income effect is greater than the substitution effect, what can be said about the total effect?
a) The total effect is positive.
b) The total effect is negative.
c) The total effect is zero.
d) The total effect is indeterminate.
Correct Answer: b) The total effect is negative.
15. **Normal vs. Inferior Goods**:
Question: For an inferior good, what happens to the income effect when its price falls?
a) The income effect reinforces the substitution effect.
b) The income effect opposes the substitution effect.
c) There is no income effect for inferior goods.
d) The income effect and the substitution effect cancel each other out.
Correct Answer: a) The income effect reinforces the substitution effect.
16. **Consumer Choices and Total Effect**:
Question: If the price of a good falls, leading to an increase in quantity demanded, and both the income and substitution effects are in the same direction, what can be said about the total effect?
a) The total effect is positive.
b) The total effect is negative.
c) The total effect is zero.
d) The total effect is indeterminate.
Correct Answer: a) The total effect is positive.
17. **Consumer Preferences and Income Effect**:
Question: When a consumer's income decreases, and they reduce their consumption of a normal good, what effect is primarily at play?
a) The substitution effect.
b) The income effect.
c) The total effect.
d) The luxury effect.
Correct Answer: b) The income effect.
18. **Price Changes and Substitution Effect**:
Question: Which effect tends to dominate when the price of a good changes, leading to a significant change in the consumer's choice of goods?
a) The income effect.
b) The substitution effect.
c) The total effect.
d) The indifference effect.
Correct Answer: b) The substitution effect.
19. **Consumer Behavior and Giffen Goods**:
Question: In the case of Giffen goods, what happens to the substitution effect when the price rises?
a) The substitution effect reinforces the income effect.
b) The substitution effect opposes the income effect.
c) There is no substitution effect for Giffen goods.
d) The substitution effect and the income effect cancel each other out.
Correct Answer: b) The substitution effect opposes the income effect.
20. **Price Changes and Inferior Goods**:
Question: If the price of an inferior good decreases, what typically happens to the income effect?
a) The income effect reinforces the substitution effect.
b) The income effect opposes the substitution effect.
c) There is no income effect for inferior goods.
d) The income effect and the substitution effect cancel each other out.
Correct Answer: a) The income effect reinforces the substitution effect.
