ECO3600-01
Quiz #3 (10 points)
NAME:__________________________________
True/False and Multiple Choice (2 points each)
___1) The school voucher program we discussed in class would immediately and unambiguously increase the
utility of every family in Georgia.
___2) Assuming they are equal-cost, an excise subsidy increases the utility of the individuals receiving the
subsidy more than a lump sum subsidy.
___3) The effect of replacing an excise subsidy with an equal-cost lump-sum grant is to
a) increase consumption of the subsidized good and increase consumption of other goods.
b) increase consumption of the subsidized good and decrease consumption of other goods.
c) decrease consumption of the subsidized good and increase consumption of other goods.
d) decrease consumption of the subsidized good and decrease consumption of other goods.
Short Answer
1) Draw a diagram of an individual’s consumption decision between books (put it on the x-axis) and movies (put
it on the y-axis). (I suggest you draw this graph large, so you have room to do part 2 on the same graph.)
(1 point)
2) On the same graph, show the effect of an increase in the price of books. Graphically decompose the total
change in desired consumption of books into the income and substitution effects assuming that books are an
inferior good. (3 points)