Question 1

The assumption that preferences are complete:

Accepted Answer

A) means that a consumer will spend her entire income. 
B) is unnecessary,as long as transitivity is assumed. 
C) recognizes that there may be pairs of market baskets that cannot be compared. 
D) means that the consumer can compare any two market baskets of goods and determine that either one is preferred to the other or that she is indifferent between them. 
A) means that a consumer will spend her entire income. 
B) is unnecessary,as long as transitivity is assumed. 
C) recognizes that there may be pairs of market baskets that cannot be compared. 
D) means that the consumer can compare any two market baskets of goods and determine that either one is preferred to the other or that she is indifferent between them. D

Question 2

The theory of consumer behavior is based on certain assumptions.The set of four basic assumptions includes:

Accepted Answer

A) completeness. 
B) transitivity. 
C) intransitivity. 
D) Both A and B are correct. 
E) Both A and C are correct. 
A) completeness. 
B) transitivity. 
C) intransitivity. 
D) Both A and B are correct. 
E) Both A and C are correct. D

Question 3

Roberta lives alone on a deserted island.She can spend her time gathering coconuts or bananas.She has 16 hours available each day and can gather 4 coconuts in an hour or 8 bananas in an hour.Diagram Roberta's budget constraint.Given that Roberta's Marginal Utility of bananas is always 25 and her Marginal utility of coconuts is always 100,what is her optimal consumption? One day an individual from a neighboring island arrives by boat and offers to exchange any number of fruits at a rate of 1 coconut for 1 banana.Diagram Roberta's budget constraint at this exchange rate assuming she will now spend all her time gathering bananas.Is Roberta better off? What does she consume?

Accepted Answer

Roberta's initial budget constraint is BC₁ on the diagram below.Since Roberta's indifference curves are always flatter than her budget constraint,Roberta will consume all coconuts.Thus,she gathers and consumes 64 coconuts.When her neighbor arrives and offers the exchange,her budget constraint becomes BC₂.It is now optimal for her to gather all bananas and exchange them 1 for 1 with her neighbor for coconuts.This gives her 128 coconuts to consume.This brings her to the higher indifference curve I₂.Roberta is better off.

Question 4

Which of the following statements is true about a consumer's optimal decision when indifference curves are concave?

Accepted Answer

A) Both goods are consumed. 
B) No goods are consumed. 
C) Only one of the goods is consumed. 
D) It occurs at the point of tangency with the budget line. 
A) Both goods are consumed. 
B) No goods are consumed. 
C) Only one of the goods is consumed. 
D) It occurs at the point of tangency with the budget line.

Question 5

The budget constraint for a consumer who only buys apples (A)and bananas (B)is PAA + PBB = I where consumer income is I,the price of apples is PA,and the price of bananas is PB.To plot this budget constraint in a figure with apples on the horizontal axis,we should use a budget line represented by the slope-intercept equation:

Accepted Answer

A) A = -I/PA + (PB/P
A) B 
B) A = I/PA - (PB/P
A) B 
C) B = -I/PB + (PA/P
B) A 
D) B = I/PB - (PA/P
B) A 
A) A = -I/PA + (PB/P
A) B 
B) A = I/PA - (PB/P
A) B 
C) B = -I/PB + (PA/P
B) A 
D) B = I/PB - (PA/P
B) A

Question 6

A consumer maximizes satisfaction at the point where his valuation of good X,measured as the amount of good Y he would willingly give up to obtain an additional unit of X,equals:

Accepted Answer

A) the magnitude of the slope of the indifference curve through that point. 
B) one over the magnitude of the slope of the indifference curve through that point. 
C) Px/Py 
D) Py/Px 
A) the magnitude of the slope of the indifference curve through that point. 
B) one over the magnitude of the slope of the indifference curve through that point. 
C) Px/Py 
D) Py/Px

Question 7

Consider the following three market baskets:
Table 3.1  
-Refer to Table 3.1.Which of the following cannot be true?

Accepted Answer

A) The consumer could be indifferent between A and B. 
B) A and C could be on the same indifference curves. 
C) The consumer could be indifferent between B and C. 
D) A and C could be on different indifference curves. 
A) The consumer could be indifferent between A and B. 
B) A and C could be on the same indifference curves. 
C) The consumer could be indifferent between B and C. 
D) A and C could be on different indifference curves.

Question 8

Larry lives with his parents and enjoys listening to jazz.Because of his living arrangements,his only expense is on jazz music.To earn money to buy new albums,Larry must work.Larry has 16 hours per day he could spend listening to jazz or working.Each hour he works he earns $6.Each album costs him $12.Diagram Larry's budget constraint for new jazz albums and time spent listening to jazz.If Larry's parents require him to spend two hours per day doing chores around the house,what happens to his budget constraint? Does the requirement to do chores make Larry worse off?

Accepted Answer

Larry's budget constraints are indicated

Question 9

Use the following statements to answer this question: I.The equal marginal principle may be used to characterize the maximum utility consumption decision even if the diminishing MRS assumption does not hold.
II.The equal marginal principle implies that the MRS at the optimal consumption bundle is always equal to the price ratio.

Accepted Answer

A) I and II are true. 
B) I is true and II is false. 
C) II is true and I is false. 
D) I and II are false. 
A) I and II are true. 
B) I is true and II is false. 
C) II is true and I is false. 
D) I and II are false.

Question 10

Scenario 3.1:
Andy derives utility from two goods,potato chips (Qp)and Cola (Qc).Andy receives zero utility unless he consumes some of at least one good.The marginal utility that he receives from the two goods is given as follows:  
-Refer to Scenario 3.1.If the price of potato chips is $0.50 and the price of Cola is $4.00,and Andy has an income of $14.50,how many units of potato chips will he consume?

Accepted Answer

A) 5 
B) 6 
C) 7 
D) 8 
E) none of the above 
A) 5 
B) 6 
C) 7 
D) 8 
E) none of the above

Question 11

Lisa's budget line and her satisfaction maximizing market basket,A,are shown in the diagram below.   a.Suppose that Lisa is given $50 worth of coupons that must be spent on food.How will the coupons alter Lisa's budget line?
b.Suppose that Lisa is given $50 in cash instead of $50 in coupons.How will this alter Lisa's budget line?
c.Is Lisa indifferent between the food coupon and cash program,or does she prefer one program over the other? Draw an indifference curve to illustrate your answer.

Accepted Answer

Refer to the following diagram with the

Question 12

Tammy and Tad's father has given each of them a debit card and allows each of them to use the card to spend $500 each month.Tammy and Tad use their $500 to buy only CDs and gasoline.In February,the price of a CD was $10 and the price of gasoline was $1 per gallon.At these prices,Tammy purchased 45 CDs and 50 gallons of gas.Ted consumed 20 CDs and 300 gallons of gas.For the month of March,Tammy and Tad's father lost the records indicating who had which debit card.From the bank statement in March,their father learned that the price of a CD was $12 and a gallon of gas cost $0.80.The first debit card was used to purchase 235 gallons of gas and 26 CDs.The second debit card was used to purchase 265 gallons of gas and 24 CDs.Using revealed preference theory,identify which card Tammy must possess.

Accepted Answer

@#IMG-DLM& From the diagram,we see that point D is

Question 13

An island economy produces only two goods,coconuts and pineapples.There are five people (A,B,C,D,and E)living on the island with these preferences:
A has a strong preference for pineapples.
B has a strong preference for coconuts.
C doesn't care for pineapples (assigns no value to them).
D doesn't care for coconuts (assigns no value to them)
E will only consume pineapples and coconuts in the fixed proportion of
one pineapple to one coconut.
For each of these five individuals,construct a representative indifference curve with pineapples on the vertical axis and coconuts on the horizontal axis.Discuss the shape of the indifference curves and relate them to the MRS.

Accepted Answer

@#IMG-DLM& @#IMG-DLM& Individual A has relatively flat indif

Question 14

Alvin's preferences for good X and good Y are shown in the diagram below.   Figure 3.1
-Refer to Figure 3.1.Which of the following is true concerning Alvin's marginal rate of substitution?

Accepted Answer

A) It is diminishing. 
B) It is positive but varies along the indifference curve. 
C) It is constant. 
D) It is zero. 
A) It is diminishing. 
B) It is positive but varies along the indifference curve. 
C) It is constant. 
D) It is zero.

Question 15

Use the following two statements to answer this question: I.Consumer theory can determine whether giving an individual a more preferred basket of goods doubles her overall level of satisfaction,less than doubles her satisfaction,or more than doubles her satisfaction.
II.There is not much empirical evidence to support the assumption that higher incomes result in higher levels of satisfaction.

Accepted Answer

A) Both I and II are true. 
B) I is true and II is false. 
C) I is false and II is true. 
D) Both I and II are false. 
A) Both I and II are true. 
B) I is true and II is false. 
C) I is false and II is true. 
D) Both I and II are false.

Question 16

Gary Franklin is a movie critic.He invented the Franklin Scale with which he rates movies from 1 to 10 (10 being best).When asked about his scale,Mr.Franklin explained "that it is a subjective measure of movie quality.A movie with a ranking of 10 is not necessarily 10 times better than a movie with a ranking of 1,but it is better.A movie with a ranking of 5 is better than a movie with a ranking of 1,but is not as good a movie with a ranking of 10.That's all it really tells you." Based on Mr.Franklin's description,his scale is:

Accepted Answer

A) ordinal but not cardinal. 
B) cardinal but not ordinal. 
C) an objective standard to judge movies. 
D) neither cardinal nor ordinal. 
A) ordinal but not cardinal. 
B) cardinal but not ordinal. 
C) an objective standard to judge movies. 
D) neither cardinal nor ordinal.

Question 17

Bill uses his entire budget to purchase Pepsi and hamburgers,and he currently purchases no Pepsi and 6 hamburgers per week.The price of Pepsi is $1 per can,the price of a hamburger is $2,Bill's marginal utility from Pepsi is 2,and his marginal utility from hamburgers is 6.Is Bill's current consumption decision optimal?

Accepted Answer

A) No,he should increase Pepsi consumption and reduce hamburger consumption. 
B) No,he should purchase more of both goods. 
C) Yes,the corner solution is best because his MRS is less than the price ratio. 
D) We do not have enough information to answer this question. 
A) No,he should increase Pepsi consumption and reduce hamburger consumption. 
B) No,he should purchase more of both goods. 
C) Yes,the corner solution is best because his MRS is less than the price ratio. 
D) We do not have enough information to answer this question.

Question 18

An increase in income,holding prices constant,can be represented as:

Accepted Answer

A) a change in the slope of the budget line. 
B) a parallel outward shift in the budget line. 
C) an outward shift in the budget line with its slope becoming flatter. 
D) a parallel inward shift in the budget line. 
A) a change in the slope of the budget line. 
B) a parallel outward shift in the budget line. 
C) an outward shift in the budget line with its slope becoming flatter. 
D) a parallel inward shift in the budget line.

Question 19

A consumer has $100 per day to spend on product A,which has a unit price of $7,and product B,which has a unit price of $15.What is the slope of the budget line if good A is on the horizontal axis and good B is on the vertical axis?

Accepted Answer

A) -7/15 
B) -7/100 
C) -15/7 
D) 7/15 
A) -7/15 
B) -7/100 
C) -15/7 
D) 7/15

Question 20

An ideal cost-of-living index measures:

Accepted Answer

A) The relative cost of maintaining a particular utility level. 
B) The relative changes in consumer satisfaction that arise from price increases. 
C) The relative price of those goods that are considered to be necessities in consumption. 
D) none of the above 
A) The relative cost of maintaining a particular utility level. 
B) The relative changes in consumer satisfaction that arise from price increases. 
C) The relative price of those goods that are considered to be necessities in consumption. 
D) none of the above

The assumption that preferences are complete:

The theory of consumer behavior is based on certain assumptions.The set of four basic assumptions includes:

Which of the following statements is true about a consumer's optimal decision when indifference curves are concave?

A consumer maximizes satisfaction at the point where his valuation of good X,measured as the amount of good Y he would willingly give up to obtain an additional unit of X,equals:

Consider the following three market baskets: Table 3.1 -Refer to Table 3.1.Which of the following cannot be true?

Alvin's preferences for good X and good Y are shown in the diagram below. Figure 3.1 -Refer to Figure 3.1.Which of the following is true concerning Alvin's marginal rate of substitution?

An increase in income,holding prices constant,can be represented as:

A consumer has $100 per day to spend on product A,which has a unit price of $7,and product B,which has a unit price of $15.What is the slope of the budget line if good A is on the horizontal axis and good B is on the vertical axis?

An ideal cost-of-living index measures:

Preliminaries

The Basics of Supply and Demand

Individual and Market Demand

Uncertainty and Consumer Behavior

Production

The Cost of Production

Profit Maximization and Competitive Supply

The Analysis of Competitive Markets

Market Power: Monopoly and Monopsony

Pricing With Market Power

Monopolistic Competition and Oligopoly

Game Theory and Competitive Strategy

Markets for Factor Inputs

Investment,time and Capital Markets

General Equilibrium and Economic Efficiency 1-83

Markets With Asymmetric Information

Externalities and Public Goods

Filters

Exam 3: Consumer Behavior

The assumption that preferences are complete:

The theory of consumer behavior is based on certain assumptions.The set of four basic assumptions includes:

Which of the following statements is true about a consumer's optimal decision when indifference curves are concave?

A consumer maximizes satisfaction at the point where his valuation of good X,measured as the amount of good Y he would willingly give up to obtain an additional unit of X,equals:

Consider the following three market baskets: Table 3.1 -Refer to Table 3.1.Which of the following cannot be true?

Alvin's preferences for good X and good Y are shown in the diagram below. Figure 3.1 -Refer to Figure 3.1.Which of the following is true concerning Alvin's marginal rate of substitution?

An increase in income,holding prices constant,can be represented as:

A consumer has $100 per day to spend on product A,which has a unit price of $7,and product B,which has a unit price of $15.What is the slope of the budget line if good A is on the horizontal axis and good B is on the vertical axis?

An ideal cost-of-living index measures:

Preliminaries

The Basics of Supply and Demand

Individual and Market Demand

Uncertainty and Consumer Behavior

Production

The Cost of Production

Profit Maximization and Competitive Supply

The Analysis of Competitive Markets

Market Power: Monopoly and Monopsony

Pricing With Market Power

Monopolistic Competition and Oligopoly

Game Theory and Competitive Strategy

Markets for Factor Inputs

Investment,time and Capital Markets

General Equilibrium and Economic Efficiency 1-83

Markets With Asymmetric Information

Externalities and Public Goods

Filters