Suppose that high-definition television sets (HDTVs) are normal goods. Would the compensated demand curve for HDTVs be flatter or steeper than the uncompensated demand curve? Explain your answer using a carefully-labeled graph.
What will be an ideal response?
See Figure 6.11. The compensated demand curve for HDTVs would be steeper than the uncompensated demand curve. The compensated demand curve shows only the substitution effect resulting from a price change. Suppose the price of HDTVs is initially P1 and the corresponding quantity is Qa. Now suppose that the price of HDTVs increases to P2. The consumer would move from point a to point b on the compensated demand curve. That is, the quantity demanded would fall from Qa to Qb. The uncompensated demand curve shows both the substitution and income effects resulting from a change in price. As the price of HDTVs increases, a consumer's real income falls. Since HDTVs are normal goods, the fall in real income will lead to a further decrease in the demand for HDTVs. As the price rises, the consumer will move from point a to point c on the uncompensated demand curve. That is, the quantity demanded falls from Qa to Qc. The horizontal difference between points b and c represents the income effect of the increase in price.
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What will be an ideal response?
The relationship between inflation and unemployment is depicted by the
A. Phillips curve. B. production possibility curve. C. aggregate demand curve. D. aggregate supply curve.
Refer to the information provided in Table 19.1 below to answer the question that follows.
Table 19.1 
Refer to Table 19.1. The tax rate structure in this example is
A. proportional. B. progressive. C. regressive. D. marginal.
If Argentina has an absolute advantage in the production of beef and Guatemala has an absolute advantage in the production of bananas, then
A. it is reasonable to expect that specialization will benefit both countries, but trade will not. B. neither country has anything to gain from specialization and trade. C. it is reasonable to expect that trade will benefit both countries, but specialization will not. D. it is reasonable to expect that specialization and trade will benefit both countries.