Question 1

When a consumer experiences a price increase for an inferior good,it is possible that the income effect is

Accepted Answer

A) greater than the substitution effect and the demand curve will be downward sloping. 
B) greater than the substitution effect and the demand curve will be upward sloping. 
C) less than the substitution effect and the demand curve will be upward sloping. 
D) less than the substitution effect but the substitution effect is positive and the demand curve will be upward sloping. 
A) greater than the substitution effect and the demand curve will be downward sloping. 
B) greater than the substitution effect and the demand curve will be upward sloping. 
C) less than the substitution effect and the demand curve will be upward sloping. 
D) less than the substitution effect but the substitution effect is positive and the demand curve will be upward sloping. B

Question 2

The substitution effect of an increase in the interest rate will result in an increase in

Accepted Answer

A) consumption when young and increase in savings when young. 
B) consumption when old and an increase in savings when young. 
C) consumption when young and an increase in savings when old. 
D) savings when old and an increase in consumption when old. 
A) consumption when young and increase in savings when young. 
B) consumption when old and an increase in savings when young. 
C) consumption when young and an increase in savings when old. 
D) savings when old and an increase in consumption when old. B

Question 3

An increase in income will cause a consumer's budget constraint to

Accepted Answer

A) shift outward, parallel to its initial position. 
B) shift inward, parallel to its initial position. 
C) pivot around the "Y" axis. 
D) pivot around the "X" axis. 
A) shift outward, parallel to its initial position. 
B) shift inward, parallel to its initial position. 
C) pivot around the "Y" axis. 
D) pivot around the "X" axis. A

Question 4

Figure 21-8
  
-Refer to Figure 21-8.If the consumer was initially at point A in the figure,a movement from point B to point C as a result of a decrease in the price of potato chips represents the

Accepted Answer

A) substitution effect. 
B) income effect. 
C) budget effect. 
D) price effect. 
A) substitution effect. 
B) income effect. 
C) budget effect. 
D) price effect.

Question 5

When considering household saving,the relative price between "consuming when young" and "consuming when old" is the

Accepted Answer

A) consumption rate. 
B) interest rate. 
C) prime rate. 
D) federal funds rate. 
A) consumption rate. 
B) interest rate. 
C) prime rate. 
D) federal funds rate.

Question 6

Suppose a consumer has preferences over two goods,x and y,which are perfect substitutes.In particular,two units of x is equivalent to one unit of y.If the price of x is $1,the price of y is $3,and the consumer has $30 of income to allocate to these two goods,how much of each good should the consumer purchase to maximize satisfaction?

Accepted Answer

A) Thirty units of x and zero units of y. 
B) Zero units of x and ten units of y. 
C) Fifteen units of x and five units of y. 
D) Twelve units of x and six units of y. 
A) Thirty units of x and zero units of y. 
B) Zero units of x and ten units of y. 
C) Fifteen units of x and five units of y. 
D) Twelve units of x and six units of y.

Question 7

At the consumer's optimum

Accepted Answer

A) the budget constraint would have a slope of MUₓ/Pₓ. 
B) it is still possible for the consumer to increase his consumption of both goods. 
C) the indifference curve would intersect the budget constraint at its center point. 
D) the slope of the indifference curve is equal to the slope of the budget constraint. 
A) the budget constraint would have a slope of MUₓ/Pₓ. 
B) it is still possible for the consumer to increase his consumption of both goods. 
C) the indifference curve would intersect the budget constraint at its center point. 
D) the slope of the indifference curve is equal to the slope of the budget constraint.

Question 8

Suppose Olivia is planning for retirement in a two-period world.In the first period Olivia is young and earns $1 million,and in the second period Olivia is old and retired and earns nothing.The interest rate is initially 10 percent,but then it falls to 7 percent.Which of the following must be true?

Accepted Answer

A) After the interest rate falls, the substitution effect will induce Olivia to consume more when she is young. 
B) After the interest rate falls, the substitution effect will induce Olivia to consume less when she is young. 
C) After the interest rate falls, the income effect will induce Olivia to consume more when she is young. 
D) After the interest rate falls, the income effect will induce Olivia to consume less when she is young. 
A) After the interest rate falls, the substitution effect will induce Olivia to consume more when she is young. 
B) After the interest rate falls, the substitution effect will induce Olivia to consume less when she is young. 
C) After the interest rate falls, the income effect will induce Olivia to consume more when she is young. 
D) After the interest rate falls, the income effect will induce Olivia to consume less when she is young.

Question 9

Suppose the price of good x falls.As a result,the quantity demanded for good x increases for a particular consumer.For this consumer,the substitution effect induced the consumer to purchase more x while the income effect induced the consumer to purchase less x.We can infer that

Accepted Answer

A) x is a normal good. 
B) x is an inferior good. 
C) x is a Giffen good. 
D) x is a luxury good. 
A) x is a normal good. 
B) x is an inferior good. 
C) x is a Giffen good. 
D) x is a luxury good.

Question 10

Suppose the only two goods that Brett consumes are wine and cheese.When wine sells for $10 a bottle and cheese sell for $10 a pound,he buys 6 bottles of wine and 4 pounds of cheese - spending his entire income of $100.One day the price of wine falls to $5 a bottle and the price of cheese increases to $20 a pound,while his income does not change.If you place wine on the vertical axis and cheese on the horizontal axis,then

Accepted Answer

A) the slope of Brett's budget has not changed. 
B) the slope of Brett's budget constraint is flatter at the new prices. 
C) the slope of Brett's budget constraint is steeper at the new prices. 
D) Brett's budget constraint has shifted in parallel to the budget constraint with the old prices. 
A) the slope of Brett's budget has not changed. 
B) the slope of Brett's budget constraint is flatter at the new prices. 
C) the slope of Brett's budget constraint is steeper at the new prices. 
D) Brett's budget constraint has shifted in parallel to the budget constraint with the old prices.

Question 11

If John's marginal utility derived from the consumption of another candy bar is 1 and the price of the candy bar is $1.50,then

Accepted Answer

A) this is the last candy bar John will purchase since the marginal utility is less than the price. 
B) the opportunity cost of the candy bar is less than $1.50. 
C) if John purchases and consumes the candy bar his total satisfaction will go down since the marginal utility is less than the price. 
D) there is not enough information to determine if John will or will not purchase the candy bar. 
A) this is the last candy bar John will purchase since the marginal utility is less than the price. 
B) the opportunity cost of the candy bar is less than $1.50. 
C) if John purchases and consumes the candy bar his total satisfaction will go down since the marginal utility is less than the price. 
D) there is not enough information to determine if John will or will not purchase the candy bar.

Question 12

An optimizing consumer will select a consumption bundle in which

Accepted Answer

A) income is maximized and prices are minimized. 
B) utility is maximized and prices are minimized. 
C) utility is maximized subject to budget constraints. 
D) utility is maximized and indifference curves are linear. 
A) income is maximized and prices are minimized. 
B) utility is maximized and prices are minimized. 
C) utility is maximized subject to budget constraints. 
D) utility is maximized and indifference curves are linear.

Question 13

Figure 21-7
  
-Refer to Figure 21-7.Assume that the consumer depicted in the figure has an income of $20.The price of Skittles is $2 and the price of M&M's is $4.This consumer will choose a consumption bundle where the marginal rate of substitution is

Accepted Answer

A) 2. 
B) 2/3. 
C) 1/2. 
D) 1/3. 
A) 2. 
B) 2/3. 
C) 1/2. 
D) 1/3.

Question 14

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

Accepted Answer

A) is constant along the indifference curve. 
B) decreases as the scarcity of one good increases. 
C) increases as the scarcity of one good increases. 
D) changes to reflect the consumer's changing preferences for the goods. 
A) is constant along the indifference curve. 
B) decreases as the scarcity of one good increases. 
C) increases as the scarcity of one good increases. 
D) changes to reflect the consumer's changing preferences for the goods.

Question 15

Assume that a college student purchases only coffee and Snickers.If coffee is an inferior good and Snickers is a normal good,then the income effect associated with an increase in the price of a Snickers will result in

Accepted Answer

A) a decrease in the consumption of Snickers and a decrease in the consumption of coffee. 
B) a decrease in the consumption of Snickers and an increase in the consumption of coffee. 
C) an increase in the consumption of Snickers and an increase in the consumption of coffee. 
D) an increase in the consumption of Snickers and a decrease in the consumption of coffee. 
A) a decrease in the consumption of Snickers and a decrease in the consumption of coffee. 
B) a decrease in the consumption of Snickers and an increase in the consumption of coffee. 
C) an increase in the consumption of Snickers and an increase in the consumption of coffee. 
D) an increase in the consumption of Snickers and a decrease in the consumption of coffee.

Question 16

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 working period and nothing in her retirement period.She must both save and consume in her work period and can earn 10 percent 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 percent.Discuss the role of income and substitution effects in determining whether Janet will increase, or decrease her savings in the work period.

Accepted Answer

a. see graph below
b. see graph below
c.

Question 17

If the consumer's income and all prices simultaneously double,then

Accepted Answer

A) the optimum consumption bundle will shift outward relative to the old optimum. 
B) the optimum consumption bundle will move leftward along the old budget constraint. 
C) the optimum consumption bundle will not change. 
D) the optimum consumption bundle will shift inward relative to the old optimum. 
A) the optimum consumption bundle will shift outward relative to the old optimum. 
B) the optimum consumption bundle will move leftward along the old budget constraint. 
C) the optimum consumption bundle will not change. 
D) the optimum consumption bundle will shift inward relative to the old optimum.

Question 18

Suppose that Annette gets an increase in her wage and she decides to work fewer hours.For her,the substitution effect of the wage change is

Accepted Answer

A) only partially offset by the income effect. 
B) more than offset by the income effect. 
C) exactly offset by the income effect. 
D) indeterminate since we do not know if consumption and leisure are normal goods for Annette. 
A) only partially offset by the income effect. 
B) more than offset by the income effect. 
C) exactly offset by the income effect. 
D) indeterminate since we do not know if consumption and leisure are normal goods for Annette.

Question 19

Consider the indifference curve map and budget constraint for two goods (B and K).Suppose the good on the horizontal axis (K)is normal.When the price of the normal good on the horizontal axis (K)increases

Accepted Answer

A) the substitution effect and income effect both cause an increase in the consumption of K. 
B) the substitution effect causes a decrease in the consumption of K and the income effect causes an increase in the consumption of K.However, the substitution effect is greater than the income effect. 
C) the substitution effect causes an increase in the consumption of K and the income effect causes a decrease in the consumption of K.However, the substitution effect is greater than the income effect. 
D) the substitution effect and income effect both cause a decrease in the consumption of K. 
A) the substitution effect and income effect both cause an increase in the consumption of K. 
B) the substitution effect causes a decrease in the consumption of K and the income effect causes an increase in the consumption of K.However, the substitution effect is greater than the income effect. 
C) the substitution effect causes an increase in the consumption of K and the income effect causes a decrease in the consumption of K.However, the substitution effect is greater than the income effect. 
D) the substitution effect and income effect both cause a decrease in the consumption of K.

Question 20

An inferior good is one in which

Accepted Answer

A) the average consumer chooses not to consume. 
B) the good is not equally valued by all consumers. 
C) an increase in income increases consumption of the good. 
D) an increase in income decreases consumption of the good. 
A) the average consumer chooses not to consume. 
B) the good is not equally valued by all consumers. 
C) an increase in income increases consumption of the good. 
D) an increase in income decreases consumption of the good.

Exam 21: The Theory of Consumer Choice

When a consumer experiences a price increase for an inferior good,it is possible that the income effect is

The substitution effect of an increase in the interest rate will result in an increase in

An increase in income will cause a consumer's budget constraint to

Figure 21-8 -Refer to Figure 21-8.If the consumer was initially at point A in the figure,a movement from point B to point C as a result of a decrease in the price of potato chips represents the

When considering household saving,the relative price between "consuming when young" and "consuming when old" is the

At the consumer's optimum

Suppose Olivia is planning for retirement in a two-period world.In the first period Olivia is young and earns $1 million,and in the second period Olivia is old and retired and earns nothing.The interest rate is initially 10 percent,but then it falls to 7 percent.Which of the following must be true?

Suppose the price of good x falls.As a result,the quantity demanded for good x increases for a particular consumer.For this consumer,the substitution effect induced the consumer to purchase more x while the income effect induced the consumer to purchase less x.We can infer that

If John's marginal utility derived from the consumption of another candy bar is 1 and the price of the candy bar is $1.50,then

An optimizing consumer will select a consumption bundle in which

Figure 21-7 -Refer to Figure 21-7.Assume that the consumer depicted in the figure has an income of $20.The price of Skittles is $2 and the price of M&M's is $4.This consumer will choose a consumption bundle where the marginal rate of substitution is

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

Assume that a college student purchases only coffee and Snickers.If coffee is an inferior good and Snickers is a normal good,then the income effect associated with an increase in the price of a Snickers will result in

If the consumer's income and all prices simultaneously double,then

Suppose that Annette gets an increase in her wage and she decides to work fewer hours.For her,the substitution effect of the wage change is

Consider the indifference curve map and budget constraint for two goods (B and K).Suppose the good on the horizontal axis (K)is normal.When the price of the normal good on the horizontal axis (K)increases

An inferior good is one in which

Ten Principles of Economics

Thinking Like an Economist

Interdependence and the Gains From Trade

The Market Forces of Supply and Demand

Elasticity and Its Applications

Supply, demand, and Government Policies

Consumers, producers, and the Efficiency of Markets

Application: the Costs of Taxation

Application: International Trade

Externalities

Public Goods and Common Resources

The Design of the Tax System

The Costs of Production

Firms in Competitive Markets

Monopoly

Oligopoly

Monopolistic Competition

The Markets for the Factors of Production

Earnings and Discrimination

Income Inequality and Poverty

Frontiers of Microeconomics

Measuring a Nations Income

Measuring the Cost of Living

Production and Growth

Saving, investment, and the Financial System

The Basic Tools of Finance

Unemployment

The Monetary System

Money Growth and Inflation

Open-Economy Macroeconomics: Basic Concepts

A Macroeconomic Theory of the Open Economy

Aggregate Demand and Aggregate Supply

The Influence of Monetary and Fiscal Policy on Aggregate Demand

The Short Run Trade Off Between Inflation and Unemployment

Five Debates Over Macroeconomic Policy

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