Exam 22: The Theory of Consumer Choice

Janet knows that she will ultimately face retirement.Assume that Janet will experience two periods in her life, one in which she works and earns income, and one in which she is retired and earns no income.Janet can earn $250 000 during her work period and nothing in her retirement period.She must both save and consume in her work period, and can earn 10 per cent interest on her savings. a.Use a graph to demonstrate Janet's budget constraint. b.On your graph, show Janet at an optimal level of consumption in the work period equal to $150 000.What is the implied optimal level of consumption in her retirement period? c.Now, using your graph from part b above, demonstrate how Janet will be affected by an increase in the interest rate on savings to 15 per cent.Discuss the role of income and substitution effects in determining whether Janet will increase or decrease her savings in the work period.

An upward-sloping individual labour supply curve is indicative of:

As a general rule, the theory of consumer choice provides insight into the behaviour of:

When two goods are perfect substitutes, the marginal rate of substitution:

Graph 22-6 -Refer to Graph 22-6.In the figure shown, an optimising consumer is most likely to select the consumption bundle associated with:

Which of the commodities below is most likely to be categorised as an inferior good?

A consumer who doesn't spend all of her income:

If the income effect and substitution effect work in the same direction, then the good in question is a:

The budget constraints shows the different possible combinations of goods that can be consumed at current prices and using all the consumer's income.

Graphically demonstrate the conditions associated with a consumer optimum.Carefully label all curves and axes.

One reason an individual labour supply curve may be backward-sloping is that: (i) work hours decline as technology raises worker productivity (ii) a raise may prompt a person to devote more time to leisure than to work (iii) a wage fall may cause a person to not work as hard

Graph 22-8 -Refer to Graph 22-8.If the consumer is currently at point A on the graph shown, a change to point B as a result of a decrease in the price of potato chips would show the:

When leisure is a normal good, the income effect from an increase in wages is manifest in a(n):

When indifference curves are bowed inward toward the origin:

Because indifference curves are linear for each type of good, the marginal rate of substitution is the same at all points on a given indifference curve.

An indifference curve can be thought of as:

Graph 22-3 -Refer to Graph 22-3.Using the figure in panel (a), if income is equal to $160, the price of good Y is:

Frida and Brent, two economists working on public policy, are discussing a compensation scheme to accompany the introduction of a new carbon tax.The scheme compensates households by giving them just enough money to put them back on the same indifference curve they were on before the introduction of the tax."This compensation scheme is pointless," proclaims Brent."If we put consumers back on the same indifference curve, they will purchase the same bundle of goods they did before and we won't achieve any reduction in carbon emissions." "Nah, you're so wrong," argues Frida, "what matters is the relative prices of the goods.As long as they are different we can still lower carbon emissions" Is Frida or Brent correct? Explain your reasoning.

A consumer always prefers to be on a higher indifference curve to a lower indifference curve.

Indifference curves are downward-sloping and linear.