macroeconomics m/c 4

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13. Income elasticity of demand

  1. Measures the sensitivity of income to quantity demanded, and is calculated using the equation (%ΔI)/(%ΔQ).
  2. Measures the sensitivity of quantity demanded to income, and is calculated using the equation (%ΔQ/(%ΔI).
  3. Measures the sensitivity of quantity demanded to income, and is calculated using the equation (%ΔI)/(%ΔQ).
  4. Measures the sensitivity of price to income, and is calculated using the equation (%ΔP)/(%ΔI).

Consumer Theory

14. Budget constraints

  1. are easily circumvented by borrowing funds to purchase additional goods and services.
  2. are known to exist for the consumer but cannot be quantified.
  3. can be circumvented by consumers if rational purchasing decisions are made.
  4. limit the amount of goods and services that a consumer can purchase in a given time period.

15. The three basic assumptions underlying consumer preferences are

  1. Consumers can compare and rank all possible market baskets of goods and services, their preferences are transitive and consumers prefer more to less.
  2. Consumers face budget constraints, prefer less expensive good and services to those that are more expensive, and always experience dissatisfaction with their level of consumption.
  3. Consumers do not always make rational purchasing decisions, often prefer less to more of a good or service, and are inconsistent in their preferences for different baskets of goods.
  4. Consumers are unable to rank market baskets containing different goods and services, preferences are not transitive and consumers prefer more to less.

16. The budget line illustrates all combinations of market baskets of two goods X and Y

  1. that can be purchased with a given income level, represented by the equation I=Y+(Px/Py)X, where Px and Py are the prices of goods X and Y and I is income.
  2. that can be purchased with a given income level, represented by the equation I=Y-(Px/Py)X, where Px and Py are the prices of goods X and Y and I is income.
  3. that can be purchased with a given income level, represented by the equation I=PxX+PyY, where Px and Py are the prices of goods X and Y and I is income.

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