Exam 22: The Theory of Consumer Choice

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:

Amy is a professional photographer who specialises in portrait photography. Amy is typically awake for 112 hours each week (she sleeps an average of 8 hours each day). For each hour Amy spends photographing, she can earn $200. -Refer to the information provided. If Amy decides to spend 80 hours a week playing tennis, and the rest of her time photographing, how much income will she have available to spend on consumption goods?

Draw a budget constraint that is consistent with the following prices and income. Income = 100 PY = 25 PX = 12.5 a. Demonstrate how your original budget constraint would change if income increased to 250. b. Demonstrate how your original budget constraint would change if PY decreased to 10. c. Demonstrate how your original budget constraint would change if PX increased to 20.

Graph 22-4 -Refer to Graph 22-4. A person who chooses to consume bundle C rather than bundle A is likely to:

Graph 22-4 -Refer to Graph 22-4. Based on this graph, which of the following statements is correct?

In many developing countries there are sudden leaps in consumption from one good to another. An example is transport. At low levels of GDP, people often use bicycles or motor scooters. As income rises, there is often a dramatic switch to motor cars, such that bicycles and scooters are much rarer. How can these jumps be explained in terms of normal and inferior goods?

An indifference curve can be thought of as:

Diane knows that she will ultimately face retirement. Assume that Diane 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. Diane can earn $250,000 during her work period and nothing in her retirement period. She must both save and consume in her work period with an interest rate of 10 per cent on savings. -Refer to the information provided. If the interest rate on Diane's savings increases, it is possible that:

The theory of consumer choice examines:

Substitution effects always dominate income effects.

An optimising consumer will select a consumption bundle in which the:

Graph 22-9 -Refer to Graph 22-9. Assume that the consumer depicted in the graph has an income of $50 and currently optimises at pointA. When the price of marshmallows decreases to $2.50, the optimising consumer will choose to purchase how many units of marshmallows?

When the price of a good decreases, ceteris paribus, the lower price:

The combination of two goods a consumer chooses depends on his:

If an indifference curve is bowed in toward the origin, the marginal rate of substitution is:

When income increases, a budget constraint will:

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.

If the consumption of one good is increased, how must a consumer alter his consumption of another good in order to remain indifferent between two bundles?

The goal of a consumer can be to either maximise utility or to end up on the highest possible indifference curve, since these phrases are synonymous.

The optimal level of consumption occurs where the marginal rate of substitution is greater than the sum of the relative price and the consumer has spent all his or hers income.