As a group, U.S. consumers have no income response for their consumption of ice cream so that the income elasticity of demand for ice cream equals zero.
Does this mean that the change in ice cream consumption that results from a price increase is entirely composed of the substitution effect? A) Yes, the income effect associated with a price change is zero
B) No, any price change moves the point of consumption to a new indifference curve, so there must be a non-zero income effect
C) No, the income and substitution effects in this case move in opposite directions and completely offset one another, so it only appears that the income effect is zero
D) We need more information about the goods to answer this question
Question 2
Consider a linear, upward sloping supply curve. If the supply curve shifts upward, then:
A) the price elasticity of supply will increase.
B) the price elasticity of supply will increase if the slope of the supply curve is greater than one.
C) the price elasticity of supply will increase if the slope of the supply curve is greater than one and the lowest price needed to induce firms to supply anything is positive.
D) the price elasticity of supply will be constant.
E) none of the above
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