Exam 21: The Theory of Consumer Choice

When considering her budget, the highest indifference curve that a consumer can reach is the

Suppose a consumer has an income of $800 per month and that she spends her entire income each month on beer and bratwurst. The price of a pint of beer is $5, and the price of a bratwurst is $4. Which of the following combinations of beers and bratwursts represents a point that would lie to the interior of the consumer's budget constraint?

Figure 21-9 -Refer to Figure 21-9. If the consumer has $600 in income, what is the price of good Y?

Scenario 21-2 Lawrence has recently graduated from college with a degree in journalism and economics. He has decided to pursue a career as a freelance journalist writing for business newspapers and magazines. Lawrence is typically awake for 112 hours each week (he sleeps an average of 8 hours each day). For each hour Lawrence spends writing, he can earn $75. Lawrence is such a good writer that he can get paid for as many hours of writing as he chooses to work. -Refer to Scenario 21-2. If Lawrence decides to spend 80 hours a week playing volleyball on the beach and the rest of his time writing, how much income will he have available to spend on consumption goods?

Given a consumer's indifference map, the demand curve for a good can

Consider the indifference curve map and budget constraint for two goods, beef and potatoes. Suppose the good measured on the horizontal axis, potatoes, is a Giffen good. Beef is measured on the vertical axis and is a normal good. When the price of potatoes increases, the substitution effect causes

Figure 21-18 -Refer to Figure 21-18. Bundle D represents a point where

A consumer chooses an optimal consumption point where the

If the consumer's income and all prices simultaneously decrease by one-half, then the optimum consumption will

If the price of a good increases, all else equal, consumers perceive

The consumer's optimum choice is represented by

At the consumer's optimum

We can use the theory of consumer choice to analyze

The indifference curves for perfect substitutes are straight lines.

Higher education is a normal good. If its price falls,

What is significant about a point on a graph at which an indifference curve is tangent to a budget constraint?

A consumer's optimal choice is affected by income, prices of goods, and preferences.

Figure 21-27 -Refer to Figure 21-27. Anna experiences an increase in her hourly wage. Her optimal choice point moves from A to B. For Anna,

Figure 21-32 The figure shows three indifference curves and a budget constraint for a consumer named Hannah. When young, Hannah works and earns income. When old, she is retired and earns no income. -Refer to Figure 21-32. If Hannah chose to spend $30,000 on consumption when young, then how much could she spend on consumption when old?

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. <sub