g. Marginal utility analysis tells us that a rise in the price of
a good, ceteris paribus, leads each consumer to reduce the
of the good. This, in turn, predicts a demand
curve.
2. Fill in the blanks to make the following statements correct.
a. The substitution effect is the change in quantity
demanded that results from a change in , while real
income is.
b. The income effect is the change in quantity demanded
that results from a change in , while relative prices are
.
c. For a normal good (positive income elasticity of demand)
the income and substitution effects of a price increase
work in the direction. Each of the two effects will lead
to a in quantity demanded.
d. For an inferior good (negative income elasticity of
demand) the income and substitution effects of a price
increase work in directions. The substitution effect
will lead to a(n) in quantity demanded and the
income effect will lead to a(n) in quantity demanded.
e. The total effect on quantity demanded due to a price
change is determined by the sum of the effect and the
effect. As long as the effect does not outweigh the
effect, the demand curve will be downward sloping.
3. Fill in the blanks to make the following statements correct.
a. Total consumer surplus is the area the demand curve
and the price line. Consumer surplus on any one unit
