Maya is doing her undergrad at Queen's University. She loves donuts and chocolate chip cookies (CCC). Her utility function is given by u(x, y) = √8x + 5 + 2y, where x denotes her consumption of donuts and y denotes her consumption of CCC. Her budget is $10/day. The price of a donut is $1.

Figure 4-6Refer to Figure 4-6.  The movement from D’ to D could be caused by   a. an increase in the price of a complement.   b. a decrease in income, assuming the good is inferior.   c. a decrease in price.   d. buyers expecting the price of the good to fall in the near future.

Which of the following statements is true for a Giffen good?   (a) Following a fall in the price of the good, there will be a decrease in the quantity demanded due to the substitution effect; an increase in the quantity demanded due to the income effect; the substitution effect will outweigh the income effect. (b) Following a fall in the price of the good, there will be an increase in the quantity demanded due to both the substitution and income effect and the two effects will therefore reinforce each other. (c) Following a fall in the price of the good, there will be an increase in the quantity demanded due to the substitution effect; a decrease in the quantity demanded due to the income effect; the substitution effect will outweigh the income effect. (d) Following a fall in the price of the good, there will be an increase in the quantity demanded due to the substitution effect; a decrease in the quantity demanded due to the income effect; the income effect will outweigh the…

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