CHAPTER 8: Slutsky Equation
MULTIPLE CHOICE
1. In Problem 1, Charlie’s utility function is xAxB. The price of apples used to be $1 per unit, and the price
of bananas $2 per unit. His income was $40 per day. If the price of apples increased to $2.25 and the
price of bananas fell to $1.75, then in order to be able to just afford his old bundle, Charlie would have
to have a daily income of
a.
$62.50.
b.
$126.
c.
$31.25.
d.
$93.75.
e.
$250.
2. In Problem 1, Charlie’s utility function is xAxB. The price of apples used to be $1 per unit, and the price
of bananas $2 per unit. His income was $40 per day. If the price of apples increased to $1.75 and the
price of bananas fell to $.25, then in order to be able to just afford his old bundle, Charlie would have
to have a daily income of
a.
$76.
b.
$18.75.
c.
$56.25.
d.
$37.50.
e.
$150.
3. In Problem 1, Charlie’s utility function is xAxB. The price of apples used to be $1 per unit, and the price
of bananas $2 per unit. His income was $40 per day. If the price of apples increased to $1.25 and the
price of bananas fell to $.25, then in order to be able to just afford his old bundle, Charlie would have
to have a daily income of
a.
$13.75.
b.
$41.25.
c.
$27.50.
d.
$56.
e.
$110.
4. In Problem 1, Charlie’s utility function is xAxB. The price of apples used to be $1 per unit, and the price
of bananas $2 per unit. His income was $40 per day. If the price of apples increased to $1.50 and the
price of bananas fell to $1, then in order to be able to just afford his old bundle, Charlie would have to
have a daily income of
a.
$40.
b.
$20.
c.
$60.
d.
$81.
e.
$160.
5. In Problem 1, Charlie’s utility function is xAxB. The price of apples used to be $1 per unit, and the price
of bananas $2 per unit. His income was $40 per day. If the price of apples increased to $1.50 and the
price of bananas fell to $.75, then in order to be able to just afford his old bundle, Charlie would have
to have a daily income of
a.
$56.25.
b.
$37.50.
c.
$76.
d.
$18.75.
e.
$150.
6. In Problem 1, Charlie’s utility function is xAxB. The price of apples used to be $1, the price of bananas
used to be $2, and his income used to be $40. If the price of apples increased to $4 and the price of
bananas stayed constant, the substitution effect on Charlie’s apple consumption would reduce his
consumption by
a.
15 apples.
b.
3 apples.
c.
7.50 apples.
d.
12.50 apples.
e.
None of the above.
7. In Problem 1, Charlie’s utility function is xAxB. The price of apples used to be $1, the price of bananas
used to be $2, and his income used to be $40. If the price of apples increased to $7 and the price of
bananas stayed constant, the substitution effect on Charlie’s apple consumption would reduce his
consumption by
a.
6 apples.
b.
13.57 apples.
c.
8.57 apples.
d.
17.14 apples.
e.
None of the above.
8. In Problem 1, Charlie’s utility function is xAxB. The price of apples used to be $1, the price of bananas
used to be $2, and his income used to be $40. If the price of apples increased to $5 and the price of
bananas stayed constant, the substitution effect on Charlie’s apple consumption would reduce his
consumption by
a.
8 apples.
b.
16 apples.
c.
13 apples.
d.
4 apples.
e.
None of the above.
9. In Problem 1, Charlie’s utility function is xAxB. The price of apples used to be $1, the price of bananas
used to be $2, and his income used to be $40. If the price of apples increased to $5 and the price of
bananas stayed constant, the substitution effect on Charlie’s apple consumption would reduce his
consumption by
a.
8 apples.
b.
13 apples.
c.
16 apples.
d.
4 apples.
e.
None of the above.
10. In Problem 1, Charlie’s utility function is xAxB. The price of apples used to be $1, the price of bananas
used to be $2, and his income used to be $40. If the price of apples increased to $6 and the price of
bananas stayed constant, the substitution effect on Charlie’s apple consumption would reduce his
consumption by
a.
8.33 apples.
b.
13.33 apples.
c.
5 apples.
d.
16.67 apples.
e.
None of the above.
11. Neville, in Problem 2, has a friend named Marmaduke. Marmaduke has the same demand function for
claret as Neville, namely q = .02m − 2p, where m is income and p is price. Marmaduke’s income is
$8,000 and he initially had to pay a price of $40 per bottle of claret. The price of claret rose to $80.
The substitution effect of the price change
a.
reduced his demand by 80.
b.
increased his demand by 80.
c.
reduced his demand by 16.
d.
reduced his demand by 144.
e.
reduced his demand by 26.
12. Neville, in Problem 2, has a friend named Oswald. Oswald has the same demand function for claret as
Neville, namely q = .02m − 2p, where m is income and p is price. Oswald’s income is $5,500 and he
initially had to pay a price of $40 per bottle of claret. The price of claret rose to $70. The substitution
effect of the price change
a.
reduced his demand by 42.
b.
reduced his demand by 60.
c.
increased his demand by 60.
d.
reduced his demand by 78.
e.
reduced his demand by 52.
13. Neville, in Problem 2, has a friend named Edmund. Edmund has the same demand function for claret
as Neville, namely q = .02m − 2p, where m is income and p is price. Edmund’s income is $9,000 and
he initially had to pay a price of $50 per bottle of claret. The price of claret rose to $60. The
substitution effect of the price change
a.
reduced his demand by 36.
b.
increased his demand by 20.
c.
reduced his demand by 4.
d.
reduced his demand by 20.
e.
reduced his demand by 14.
14. Neville, in Problem 2, has a friend named Algernon. Algernon has the same demand function for claret
as Neville, namely q = .02m − 2p, where m is income and p is price. Algernon’s income is $5,500 and
he initially had to pay a price of $20 per bottle of claret. The price of claret rose to $50. The
substitution effect of the price change
a.
reduced his demand by 60.
b.
reduced his demand by 18.
c.
reduced his demand by 102.
d.
increased his demand by 60.
e.
reduced his demand by 28.
15. Neville, in Problem 2, has a friend named Colin. Colin has the same demand function for claret as
Neville, namely q = .02m − 2p, where m is income and p is price. Colin’s income is $7,500 and he
initially had to pay a price of $40 per bottle of claret. The price of claret rose to $80. The substitution
effect of the price change
a.
reduced his demand by 80.
b.
reduced his demand by 24.
c.
increased his demand by 80.
d.
reduced his demand by 136.
e.
reduced his demand by 34.
16. Goods 1 and 2 are perfect complements, and a consumer always consumes them in the ratio of 2 units
of good 2 per unit of good 1. If a consumer has an income of $720 and if the price of good 2 changes
from $8 to $9, while the price of good 1 stays at $1, then the income effect of the price change
a.
is 9 times as strong as the substitution effect.
b.
does not change demand for good 1.
c.
accounts for the entire change in demand.
d.
is exactly twice as strong as the substitution effect.
e.
is 8 times as strong as the substitution effect.
17. Goods 1 and 2 are perfect complements, and a consumer always consumes them in the ratio of 2 units
of good 2 per unit of good 1. If a consumer has an income of $300 and if the price of good 2 changes
from $5 to $6, while the price of good 1 stays at $1, then the income effect of the price change
a.
is exactly twice as strong as the substitution effect.
b.
accounts for the entire change in demand.
c.
does not change demand for good 1.
d.
is 6 times as strong as the substitution effect.
e.
is 5 times as strong as the substitution effect.
18. Goods 1 and 2 are perfect complements, and a consumer always consumes them in the ratio of 2 units
of good 2 per unit of good 1. If a consumer has an income of $420 and if the price of good 2 changes
from $6 to $7, while the price of good 1 stays at $1, then the income effect of the price change
a.
does not change demand for good 1.
b.
accounts for the entire change in demand.
c.
is exactly twice as strong as the substitution effect.
d.
is 7 times as strong as the substitution effect.
e.
is 6 times as strong as the substitution effect.
19. Goods 1 and 2 are perfect complements, and a consumer always consumes them in the ratio of 2 units
of good 2 per unit of good 1. If a consumer has an income of $200 and if the price of good 2 changes
from $4 to $5, while the price of good 1 stays at $1, then the income effect of the price change
a.
does not change demand for good 1.
b.
is exactly twice as strong as the substitution effect.
c.
is 5 times as strong as the substitution effect.
d.
accounts for the entire change in demand.
e.
is 4 times as strong as the substitution effect.
20. Goods 1 and 2 are perfect complements, and a consumer always consumes them in the ratio of 2 units
of good 2 per unit of good 1. If a consumer has an income of $120 and if the price of good 2 changes
from $3 to $4, while the price of good 1 stays at $1, then the income effect of the price change
a.
is 4 times as strong as the substitution effect.
b.
does not change demand for good 1.
c.
is exactly twice as strong as the substitution effect.
d.
accounts for the entire change in demand.
e.
is 3 times as strong as the substitution effect.
21. Suppose that Agatha in Problem 10 had $465 to spend on tickets for her trip. She needs to travel a total
of 1,500 miles. Suppose that the price of first-class tickets is $.40 per mile and the price of
second-class tickets is $.10 per mile. How many miles will she travel by second class?
a.
450
b.
600
c.
225
d.
550
e.
150
22. Suppose that Agatha in Problem 10 had $440 to spend on tickets for her trip. She needs to travel a total
of 1,500 miles. Suppose that the price of first-class tickets is $.40 per mile and the price of
second-class tickets is $.20 per mile. How many miles will she travel by second class?
a.
400
b.
950
c.
900
d.
800
e.
266.67
23. Suppose that Agatha in Problem 10 had $270 to spend on tickets for her trip. She needs to travel a total
of 1,500 miles. Suppose that the price of first-class tickets is $.30 per mile and the price of
second-class tickets is $.10 per mile. How many miles will she travel by second class?
a.
1,000
b.
450
c.
1,050
d.
900
e.
300
24. Suppose that Agatha in Problem 10 had $495 to spend on tickets for her trip. She needs to travel a total
of 1,500 miles. Suppose that the price of first-class tickets is $.40 per mile and the price of
second-class tickets is $.10 per mile. How many miles will she travel by second class?
a.
500
b.
350
c.
450
d.
175
e.
116.67
25. Suppose that Agatha in Problem 10 had $360 to spend on tickets for her trip. She needs to travel a total
of 1,500 miles. Suppose that the price of first-class tickets is $.40 per mile and the price of
second-class tickets is $.10 per mile. How many miles will she travel by second class?
a.
400
b.
900
c.
950
d.
800
e.
266.67
26. In Problem 4, Maude thinks delphiniums and hollyhocks are perfect substitutes, one for one. If
delphiniums currently cost $3 per unit and hollyhocks cost $4 per unit and if the price of delphiniums
rises to $6 per unit,
a.
the income effect of the change in demand for delphiniums will be bigger than the
substitution effect.
b.
there will be no change in the demand for hollyhocks.
c.
the entire change in demand for delphiniums will be due to the substitution effect.
d.
1/3 of the change in demand will be due to the income effect.
e.
2/3 of the change in demand will be due to the income effect.
27. In Problem 4, Maude thinks delphiniums and hollyhocks are perfect substitutes, one for one. If
delphiniums currently cost $4 per unit and hollyhocks cost $5 per unit and if the price of delphiniums
rises to $9 per unit,
a.
the income effect of the change in demand for delphiniums will be bigger than the
substitution effect.
b.
1/5 of the change in demand will be due to the income effect.
c.
the entire change in demand for delphiniums will be due to the substitution effect.
d.
there will be no change in the demand for hollyhocks.
e.
4/5 of the change in demand will be due to the income effect.
28. In Problem 4, Maude thinks delphiniums and hollyhocks are perfect substitutes, one for one. If
delphiniums currently cost $4 per unit and hollyhocks cost $5 per unit and if the price of delphiniums
rises to $7 per unit,
a.
the entire change in demand for delphiniums will be due to the substitution effect.
b.
1/3 of the change in demand will be due to the income effect.
c.
the income effect of the change in demand for delphiniums will be bigger than the
substitution effect.
d.
there will be no change in the demand for hollyhocks.
e.
2/3 of the change in demand will be due to the income effect.
29. In Problem 4, Maude thinks delphiniums and hollyhocks are perfect substitutes, one for one. If
delphiniums currently cost $2 per unit and hollyhocks cost $3 per unit and if the price of delphiniums
rises to $5 per unit,
a.
there will be no change in the demand for hollyhocks.
b.
the entire change in demand for delphiniums will be due to the substitution effect.
c.
1/3 of the change in demand will be due to the income effect.
d.
the income effect of the change in demand for delphiniums will be bigger than the
substitution effect.
e.
2/3 of the change in demand will be due to the income effect.
30. In Problem 4, Maude thinks delphiniums and hollyhocks are perfect substitutes, one for one. If
delphiniums currently cost $5 per unit and hollyhocks cost $6 per unit and if the price of delphiniums
rises to $9 per unit,
a.
the income effect of the change in demand for delphiniums will be bigger than the
substitution effect.
b.
1/4 of the change in demand will be due to the income effect.
c.
there will be no change in the demand for hollyhocks.
d.
the entire change in demand for delphiniums will be due to the substitution effect.
e.
3/4 of the change in demand will be due to the income effect.