21 Jul WHICH OF THE FOLLOWING STATEMENTS IS FALSE?
Show more Bismark has peculiar preferences. He has linear indifference curves with slope -1 over pretzels and beer. Last year when the price of pretzels was $4 and the price of a pint of beer was $2 you observed that the utility maximizing Bismark consumed 20 pints of beer and no pretzels. This year a bad hop harvest raises the price of beer to $5. Which of the following statements is true given that neither his income nor preferences have changed? A. Bismark will consume 8 pints of beer and no pretzels. B. Bismark will consume 10 pretzels and no beer. C. Bismark will now divide his income equally between pretzels and beer. D. For Bismark beer and pretzels are perfect complements. E. We cant tell what happens to Bismarks optimal bundle but we know hell be better off. 2. The figure above shows a Slutsky decomposition of a fall in the price of popcorn. The initial budget line and indifference curve is in black and labeled BL1 and IC1. The final budget line and indifference curves are in green; BL3 and IC3. Which of the following statements is false? A. The change in behavior going from bundle B to C shows the income effect. B. The change in behavior going from bundle A to B shows the substitution effect. C. Popcorn is not an inferior good while steak is a normal good. D. Based on total effect steak and popcorn are complements. E. Popcorn is not a Giffen good. Show less
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