Question 1

A Giffen good is a good for which

Accepted Answer

A)  an increase in the price raises the quantity demanded. 
B)  the income effect outweighs the substitution effect. 
C)  an increase in the price decreases the quantity demanded. 
D)  Both a)and b)are correct. 
A)  an increase in the price raises the quantity demanded. 
B)  the income effect outweighs the substitution effect. 
C)  an increase in the price decreases the quantity demanded. 
D)  Both a)and b)are correct.

Question 2

A consumer's budget constraint for goods X and Y is determined by how much the consumer likes good X relative to good Y.

Accepted Answer

A) True 
 B)False

Question 3

Susie wins $1 million in her state's lottery.If Susie keeps working after she wins the money,we can infer that the income effect is larger than the substitution effect for her.

Accepted Answer

A) True 
 B)False

Question 4

The marginal rate of substitution is the slope of the budget constraint.

Accepted Answer

A) True 
 B)False

Question 5

A budget constraint illustrates the

Accepted Answer

A)  prices that a consumer chooses to pay for products he consumes. 
B)  purchases made by consumers. 
C)  consumption bundles that a consumer can afford. 
D)  consumption bundles that give a consumer equal satisfaction. 
A)  prices that a consumer chooses to pay for products he consumes. 
B)  purchases made by consumers. 
C)  consumption bundles that a consumer can afford. 
D)  consumption bundles that give a consumer equal satisfaction.

Question 6

Laura consumes only beer and chips.Her indifference curves are all bowed inward.Consider the bundles (2,6),(4,4),and (6,2).If Laura is indifferent between (2,6)and (6,2),then Laura must

Accepted Answer

A)  prefer (4,4)to (6,2). 
B)  be indifferent between (4,4)and (6,2). 
C)  prefer (6,2)to (4,4). 
D)  prefer (2,6)to (4,4). 
A)  prefer (4,4)to (6,2). 
B)  be indifferent between (4,4)and (6,2). 
C)  prefer (6,2)to (4,4). 
D)  prefer (2,6)to (4,4).

Question 7

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 14 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 8

The slope at any point on an indifference curve equals the absolute price at which a consumer is willing to substitute one good for the other.

Accepted Answer

A) True 
 B)False

Question 9

An indifference curve illustrates

Accepted Answer

A)  a firm's profits. 
B)  a consumer's budget. 
C)  a consumer's preferences. 
D)  the prices of two goods. 
A)  a firm's profits. 
B)  a consumer's budget. 
C)  a consumer's preferences. 
D)  the prices of two goods.

Question 10

Which of the following is most likely an inferior good?

Accepted Answer

A)  an antique car 
B)  gasoline 
C)  a bus ticket 
D)  an airline ticket 
A)  an antique car 
B)  gasoline 
C)  a bus ticket 
D)  an airline ticket

Question 11

In the upward-sloping portion of the individual labor supply curve,the substitution effect is

Accepted Answer

A)  greater than the income effect. 
B)  less than the income effect. 
C)  equal to the income effect. 
D)  exactly offset by the income effect. 
A)  greater than the income effect. 
B)  less than the income effect. 
C)  equal to the income effect. 
D)  exactly offset by the income effect.

Question 12

The slope of the budget constraint is all of the following except

Accepted Answer

A)  the relative price of two goods. 
B)  the rate at which a consumer can trade one good for another. 
C)  the marginal rate of substitution. 
D)  constant. 
A)  the relative price of two goods. 
B)  the rate at which a consumer can trade one good for another. 
C)  the marginal rate of substitution. 
D)  constant.

Question 13

Pepsi and pizza are normal goods.When the price of pizza falls,the substitution effect causes a

Accepted Answer

A)  shift to a lower indifference curve and the consumer buys less Pepsi. 
B)  shift to a higher indifference curve and the consumer buys more Pepsi. 
C)  movement along the indifference curve and the consumer buys more Pepsi. 
D)  movement along the indifference curve and the consumer buys less Pepsi. 
A)  shift to a lower indifference curve and the consumer buys less Pepsi. 
B)  shift to a higher indifference curve and the consumer buys more Pepsi. 
C)  movement along the indifference curve and the consumer buys more Pepsi. 
D)  movement along the indifference curve and the consumer buys less Pepsi.

Question 14

If leisure were an inferior good,then labor supply curves

Accepted Answer

A)  would all be negatively sloped. 
B)  would all be positively sloped. 
C)  would all be vertical. 
D)  could still be positively or negatively sloped. 
A)  would all be negatively sloped. 
B)  would all be positively sloped. 
C)  would all be vertical. 
D)  could still be positively or negatively sloped.

Question 15

When two goods are perfect substitutes,the

Accepted Answer

A)  indifference curve is a horizontal straight line. 
B)  marginal rate of substitution is constant. 
C)  indifference curve is a vertical straight line. 
D)  Both a and b are correct. 
A)  indifference curve is a horizontal straight line. 
B)  marginal rate of substitution is constant. 
C)  indifference curve is a vertical straight line. 
D)  Both a and b are correct.

Question 16

If the interest rate rises,an individual could choose to

Accepted Answer

A)  increase consumption when young. 
B)  increase consumption when old. 
C)  decrease consumption when young. 
D)  Any of the above could be correct. 
A)  increase consumption when young. 
B)  increase consumption when old. 
C)  decrease consumption when young. 
D)  Any of the above could be correct.

Question 17

Janet prefers cashews to almonds.She prefers macadamia nuts to peanuts,but she is indifferent between almonds and peanuts.Which of the following statements can we say for sure?

Accepted Answer

A)  Janet prefers cashews to macadamia nuts. 
B)  Janet prefers peanuts to cashews. 
C)  Janet prefers macadamia nuts to almonds. 
D)  Janet prefers almonds to macadamia nuts. 
A)  Janet prefers cashews to macadamia nuts. 
B)  Janet prefers peanuts to cashews. 
C)  Janet prefers macadamia nuts to almonds. 
D)  Janet prefers almonds to macadamia nuts.

Question 18

Figure 21-12  
-Refer to Figure 21-12.The shift from point B to point C in the figure is due to the

Accepted Answer

A)  substitution effect of an increase in the price of potato chips. 
B)  income effect of an increase in the price of potato chips. 
C)  substitution effect of a decrease in the price of potato chips. 
D)  income effect of a decrease in the price of potato chips. 
A)  substitution effect of an increase in the price of potato chips. 
B)  income effect of an increase in the price of potato chips. 
C)  substitution effect of a decrease in the price of potato chips. 
D)  income effect of a decrease in the price of potato chips.

Question 19

An increase in a consumer's income

Accepted Answer

A)  increases the slope of the consumer's budget constraint. 
B)  has no effect on the slope of the consumer's budget constraint. 
C)  decreases the slope of the consumer's budget constraint. 
D)  has no effect on the consumer's budget constraint. 
A)  increases the slope of the consumer's budget constraint. 
B)  has no effect on the slope of the consumer's budget constraint. 
C)  decreases the slope of the consumer's budget constraint. 
D)  has no effect on the consumer's budget constraint.

Question 20

An individual's demand curve for a good is derived by varying the

Accepted Answer

A)  income level and observing the resulting total utility derived from both goods. 
B)  price of one good and observing the resulting quantities of the other good. 
C)  budget line to the left and calculating the loss in total utility. 
D)  price of one good and observing the resulting quantities demanded of that good. 
A)  income level and observing the resulting total utility derived from both goods. 
B)  price of one good and observing the resulting quantities of the other good. 
C)  budget line to the left and calculating the loss in total utility. 
D)  price of one good and observing the resulting quantities demanded of that good.

Exam 21: The Theory of Consumer Choice

A Giffen good is a good for which

A consumer's budget constraint for goods X and Y is determined by how much the consumer likes good X relative to good Y.

Susie wins $1 million in her state's lottery.If Susie keeps working after she wins the money,we can infer that the income effect is larger than the substitution effect for her.

The marginal rate of substitution is the slope of the budget constraint.

A budget constraint illustrates the

Laura consumes only beer and chips.Her indifference curves are all bowed inward.Consider the bundles (2,6),(4,4),and (6,2).If Laura is indifferent between (2,6)and (6,2),then Laura must

The slope at any point on an indifference curve equals the absolute price at which a consumer is willing to substitute one good for the other.

An indifference curve illustrates

Which of the following is most likely an inferior good?

In the upward-sloping portion of the individual labor supply curve,the substitution effect is

The slope of the budget constraint is all of the following except

Pepsi and pizza are normal goods.When the price of pizza falls,the substitution effect causes a

If leisure were an inferior good,then labor supply curves

When two goods are perfect substitutes,the

If the interest rate rises,an individual could choose to

Janet prefers cashews to almonds.She prefers macadamia nuts to peanuts,but she is indifferent between almonds and peanuts.Which of the following statements can we say for sure?

Figure 21-12 -Refer to Figure 21-12.The shift from point B to point C in the figure is due to the

An increase in a consumer's income

An individual's demand curve for a good is derived by varying the

Ten Principles of Economics

Thinking Like an Economist

Interdependence and the Gains From Trade

The Market Forces of Supply and Demand

Elasticity and Its Application

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

Monopolistic Competition

Oligopoly

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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