Exam 5: Applying Consumer Theory

Draw a graph with Goods Per Day on the vertical axis and Leisure Hours Per Day increasing from left to right on the horizontal axis. Show that a person who works can work fewer hours and increase utility when the wage rate increases.

An individual derives utility from games, g (y-axis), and toy airplanes, a (x-axis), described by the utility function U(g,a)= g^0.6a^0.4. The price per game is $20 and the price of toy airplanes is $10. Using the slope of the income consumption curve (ICC), determine whether games and toy airplanes are normal or inferior goods when income increases from $100 to $200.

Suppose a graph is drawn to show a consumer's preferences for football tickets and basketball tickets. The quantity of football tickets is measured on the horizontal axis. If the price-consumption curve is horizontal when the price of football tickets changes, then

Suppose a person's utility for leisure (L)and consumption (Y)can be expressed as U = Y ∗ L and this person has no non-labor income. Assuming a wage rate of $10 per hour, show what happens to the person's labor supply when the person wins a lottery prize of $100 per day.

Under which of the following conditions will there be no substitution bias in the CPI?

For an inferior good, if the income effect more than offsets the substitution effect, we call that good

Richard receives government transfer payments and currently consumes 5 guns and 6 goose livers. Assume the price of guns decreases by 10% and the price of goose liver increases by 20%. The government raises Richard's transfer payments so he can still afford 5 guns and 6 goose livers. Does this constitute a true cost-of-living adjustment (COLA)?

When the price of a good changes, the substitution effect can be found by comparing the equilibrium quantities purchased

The amount of money one would have to take from a consumer to harm her by as much as the price increase is called

Which graph in the above figure best represents a good that is an inferior good at some income levels, and a normal good at other income levels?

A demand curve for a Giffen good would be

A backward-bending labor supply curve implies that

-The above figure shows Bobby's indifference map for soda and juice. B₁ indicates his original budget line. B₂ indicates his budget line resulting from a decrease in the price of soda. What change in quantity best represents his substitution effect?

Which of the following is the geometric mean of 4 and 9?

Median household income is $50,000 per year. The typical household spends about $125 per year on milk, which has an income elasticity of about 0.07. From this information, we can conclude that

In the case of a normal good,

-When John's income was low, he could not afford to dine out and would respond to a pay raise by purchasing more frozen dinners. Now that his income is high, a pay raise causes him to dine out more often and buy fewer frozen dinners. Which graph in the above figure best represents John's Engel curve for dining out?

What is the benefit of understanding the income and the substitution effects?

When the price of a good changes, the income effect can be found by comparing the equilibrium quantities purchased

What is one way to adjust the CPI for substitution bias?