Question : Statement 1: The substitution effect occurs when a consumer switches from one good to another due to a change in relative prices.
Statement 2: The income effect refers to the change in quantity demanded of a good due to a change in the consumer's purchasing power.
Option 1: Statement 1 is true, and statement 2 is false.
Option 2: Statement 1 is false, and statement 2 is true.
Option 3: Both statement 1 and statement 2 are true.
Option 4: Both statement 1 and statement 2 are false.
Correct Answer: Both statement 1 and statement 2 are true.
Solution : The correct answer is (c) Option C: Both statement 1 and statement 2 are true.
Statement 1 is true. The substitution effect occurs when a consumer adjusts their consumption choices in response to a change in the relative prices of goods. If the price of one good decreases relative to another, consumers tend to switch from the more expensive good to the cheaper one.
Statement 2 is also true. The income effect refers to the change in quantity demanded of a good due to a change in the consumer's purchasing power resulting from a change in income. When a consumer's income increases, they can afford to purchase more of a good, leading to an increase in the quantity demanded, and vice versa.
Question : Statement 1: Consumer surplus represents the difference between the price a consumer is willing to pay for a good and the price they actually pay.
Statement 2: Consumer surplus reflects the additional satisfaction gained by the consumer from purchasing the good.
Question : Statement 1: A consumer's demand curve for normal goods slopes downward.
Statement 2: As the price of a normal good decrease, the consumer's quantity demanded of the good increases.
Question : Statement 1: A consumer's demand for a good is income inelastic.
Statement 2: A change in the consumer's income does not significantly affect their demand for the good.
Question : Statement 1: The concept of consumer equilibrium assumes that the consumer has perfect information about prices and product attributes.
Statement 2: The consumer's equilibrium is based on rational decision-making and the pursuit of maximum satisfaction.
Question : Statement 1: The slope of the budget line represents the relative price of two goods.
Statement 2: The consumer achieves equilibrium when the marginal rate of substitution is equal to the relative price of the goods.
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