How is a compensated demand curve different from an ordinary demand curve? Why must the law of demand always hold for one while it may be violated for the other?
What will be an ideal response?
An ordinary demand curve shows how the quantity demanded at the optimum changes in reaction to a change in price. The change in quantity demanded is decomposed into substitution and income effects, and the compensated demand curve shows only how the substitution effects of price changes affect quantity demanded. Briefly, ordinary demand curves include both substitution and income effects, while compensated demand curves contain only substitution effects and no income effects. Substitution effects always support the law of demand since indifference curves are convex, but income effects will be in opposition to the law of demand if the good is inferior. Thus the law of demand must hold for compensated demand curves since they contain only substitution effects. On the other hand, the law of demand may be violated for the ordinary demand curves which include income effects-this happens when the good is inferior and the income effect outweighs the substitution effect.
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Given the scenario described, if the market price of hammers decreased from $15 to $13, which of the following can be said with certainty?
Assume there are three hardware stores, each willing to sell one standard model hammer in a given time period. House Depot can offer their hammer for a minimum of $7. Lace Hardware can offer the hammer for a minimum of $10. Bob's Hardware store can offer the hammer at a minimum price of $13. A. Bob’s Hardware would no longer participate in the market. B. Total producer surplus would decrease. C. Only Bob's Hardware will experience a drop in producer surplus. D. Bob’s Hardware would continue to participate in the market.
The size of the reduction in quantity of labor hired by a firm due to an increase in the wage rate depends upon all of the following except:
a. what percentage of total costs are made up of labor costs. b. how much quantity demanded in the output market will be reduced by a higher price. c. the capital to labor ratio before the wage increase. d. how easily other inputs can be substituted for labor.
Which of the following is a reason for the Keynesian view that monetary policy plays a minor role in affecting the economy?
a. The money demand curve is vertical. b. The investment curve is very steep. c. The money demand curve is horizontal at any interest rate. d. The monetary rule.
If the federal government runs a budget deficit, but the budget deficit as a percent of GDP is less than the growth rate of real output, the:
a. national debt will decrease as a share of GDP. b. national debt will remain a constant share of GDP. c. national debt will increase as a share of GDP. d. size of the national debt (in dollar value) will decline.