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Question from Past Microeconomics Qualifying ExamEdit

Spring 2001 - Section I, Question four, George Mason University

State first whether the following statements are true, false, or uncertain. Then briefly explain your reasoning in four or five sentences. You may use a graph if it helps clarify your answer.

As people's incomes increase, on average they will choose to live in larger homes, but then again, they may not.

AnswerEdit

False, Empirically we know that people's income elasticity of housing is roughly equal to one on average. This means that as income rises, housing will stay roughly the same portion of total disposable income. These seems likely to be expressed in bigger homes. I will reserve the caveat that more expensive does not mean bigger, in terms of housing, but I will assume that it works as a rough approximation.

This statement is false because it is ambiguous about one of the more predictable behaviors of spending with relation to changes in income.

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