Question 1

The substitution effect of an increase in the price of Raisin Bran refers to

Accepted Answer

A)  the decrease in the demand for Raisin Bran when its price rises. 
B)  the result that consumers will now switch to a substitute good such as Cheerios, and the demand curve for Raisin Bran shifts to the left. 
C)  the fact that the higher price of Raisin Bran lowers consumer's purchasing power, holding money income constant. 
D)  the fact that the higher price of Raisin Bran relative to its substitutes, such as Cheerios, cause consumers to buy less Raisin Bran. 
A)  the decrease in the demand for Raisin Bran when its price rises. 
B)  the result that consumers will now switch to a substitute good such as Cheerios, and the demand curve for Raisin Bran shifts to the left. 
C)  the fact that the higher price of Raisin Bran lowers consumer's purchasing power, holding money income constant. 
D)  the fact that the higher price of Raisin Bran relative to its substitutes, such as Cheerios, cause consumers to buy less Raisin Bran. D

Question 2

Utility is

Accepted Answer

A)  easily measured in units called utils. 
B)  subjective and difficult to measure. 
C)  the consumption of a quasi-public good like electricity or natural gas. 
D)  the production of a quasi-public good like electricity or natural gas. 
A)  easily measured in units called utils. 
B)  subjective and difficult to measure. 
C)  the consumption of a quasi-public good like electricity or natural gas. 
D)  the production of a quasi-public good like electricity or natural gas. B

Question 3

The substitution effect of an increase in the price of peaches is

Accepted Answer

A)  the change in the quantity demanded that results from a change in the price of peaches making peaches more expensive relative to other goods, holding constant the effect of the price change on consumer purchasing power. 
B)  the change in the demand for nectarines (a substitute good) that results when peaches become more expensive relative to nectarines, holding constant the effect of the price change on consumer purchasing power. 
C)  the change in the quantity demanded of peaches that results from the effect of the change in the price of peaches on the consumer's purchasing power. 
D)  the change in the demand for peaches that results when the price of peaches increases. 
A)  the change in the quantity demanded that results from a change in the price of peaches making peaches more expensive relative to other goods, holding constant the effect of the price change on consumer purchasing power. 
B)  the change in the demand for nectarines (a substitute good) that results when peaches become more expensive relative to nectarines, holding constant the effect of the price change on consumer purchasing power. 
C)  the change in the quantity demanded of peaches that results from the effect of the change in the price of peaches on the consumer's purchasing power. 
D)  the change in the demand for peaches that results when the price of peaches increases. A

Question 4

Some economists have argued that path dependence and switching costs can lead to market failure. Which of the following is an example of this argument?

Accepted Answer

A)  Costly celebrity endorsements lead many consumers to buy a product even though it is more expensive or less effective than a product that is not endorsed by a celebrity. 
B)  A consumer who won a lottery for a Super Bowl ticket refuses to sell it for $3,000 even though he would not have paid $3,000 for a ticket if he had not won the lottery. 
C)  While playing the ultimate game, an allocator decides to share $20 equally with a recipient rather than keep the $20 for herself. 
D)  VHS video recorders became more popular with consumers than Sony Betamax recorders even though the Betamax recorders embodied a superior technology. 
A)  Costly celebrity endorsements lead many consumers to buy a product even though it is more expensive or less effective than a product that is not endorsed by a celebrity. 
B)  A consumer who won a lottery for a Super Bowl ticket refuses to sell it for $3,000 even though he would not have paid $3,000 for a ticket if he had not won the lottery. 
C)  While playing the ultimate game, an allocator decides to share $20 equally with a recipient rather than keep the $20 for herself. 
D)  VHS video recorders became more popular with consumers than Sony Betamax recorders even though the Betamax recorders embodied a superior technology.

Question 5

The demand for a Giffen good slopes upward.

Accepted Answer

A) True 
 B)False

Question 6

Which of the following statements about utility and preferences is false?

Accepted Answer

A)  If Sidra prefers tea to coffee and coffee to hot chocolate, then she must prefer tea to hot chocolate. 
B)  Preferences can be ranked. 
C)  If two individuals, Ingrid and Inez, each consume the same bundle of goods, then both Inez and Ingrid must receive the same utility from the bundle. 
D)  Utility cannot be compared across consumers. 
A)  If Sidra prefers tea to coffee and coffee to hot chocolate, then she must prefer tea to hot chocolate. 
B)  Preferences can be ranked. 
C)  If two individuals, Ingrid and Inez, each consume the same bundle of goods, then both Inez and Ingrid must receive the same utility from the bundle. 
D)  Utility cannot be compared across consumers.

Question 7

Table 10-5
  
-Refer to Table 10-5, which lists the values of Harry Taber's marginal utility and marginal utility per dollar for Italian submarine (sub) sandwiches and tacos. Assume that the price of the sub sandwiches is $4 and the price of tacos is $2. When Harry's income is $14 he buys two Italian sub sandwiches and three tacos. The last column lists the values of the marginal utility per dollar for tacos when the price of tacos decreases to $1. Complete this statement: As a result of the change in price,

Accepted Answer

A)  Harry's purchasing power has increased. He will reduce his consumption of tacos so he can buy one more sub. This is an example of the substitution effect of a price change. 
B)  Harry's purchasing power has increased. If tacos are a normal good for Harry he will buy fewer tacos. This is an example of the income effect of a price change. 
C)  Harry's purchasing power has increased. If tacos are a normal good for Harry he will buy more tacos. This is an example of the income effect of a price change. 
D)  Harry's purchasing power has increased. Harry buys fewer tacos. This is an example of the substitution effect of a price change 
A)  Harry's purchasing power has increased. He will reduce his consumption of tacos so he can buy one more sub. This is an example of the substitution effect of a price change. 
B)  Harry's purchasing power has increased. If tacos are a normal good for Harry he will buy fewer tacos. This is an example of the income effect of a price change. 
C)  Harry's purchasing power has increased. If tacos are a normal good for Harry he will buy more tacos. This is an example of the income effect of a price change. 
D)  Harry's purchasing power has increased. Harry buys fewer tacos. This is an example of the substitution effect of a price change

Question 8

Most people would prefer to drive a luxury car that has all the options, but more people buy less expensive cars even though they could afford the luxury car because

Accepted Answer

A)  car buyers are irrational. 
B)  the total utility of less expensive cars is greater than that of luxury cars. 
C)  the marginal utility per dollar spent on the less expensive car is higher than that spent on luxury cars. 
D)  luxury cars cost a lot more than non-luxury cars. 
A)  car buyers are irrational. 
B)  the total utility of less expensive cars is greater than that of luxury cars. 
C)  the marginal utility per dollar spent on the less expensive car is higher than that spent on luxury cars. 
D)  luxury cars cost a lot more than non-luxury cars.

Question 9

If Paul decides to buy a $60 ticket to a Cirque du Soleil show rather than a $45 ticket for a Blue Man Group performance, we can conclude that

Accepted Answer

A)  the marginal utility per dollar spent on Cirque du Soleil is lower than the marginal utility per dollar spent on Blue Man Group. 
B)  Paul's demand for a ticket to see Cirque du Soleil is more elastic than his demand for a ticket to see Blue Man Group. 
C)  Paul is not making a rational choice. 
D)  the marginal utility per dollar spent on Cirque du Soleil is higher than the marginal utility per dollar spent on Blue Man Group. 
A)  the marginal utility per dollar spent on Cirque du Soleil is lower than the marginal utility per dollar spent on Blue Man Group. 
B)  Paul's demand for a ticket to see Cirque du Soleil is more elastic than his demand for a ticket to see Blue Man Group. 
C)  Paul is not making a rational choice. 
D)  the marginal utility per dollar spent on Cirque du Soleil is higher than the marginal utility per dollar spent on Blue Man Group.

Question 10

A common mistake made by consumers is the failure to take into account the monetary costs of their actions.

Accepted Answer

A) True 
 B)False

Question 11

Maurice Allais, Reinhard Selten and Vernon Smith all were awarded the Nobel Prize in Economics in part because

Accepted Answer

A)  of their work with experimental economics. 
B)  they discovered the first example of a Giffen good. 
C)  of their work on the substitution and income effects of price changes. 
D)  they proved that external economies would lead to market failure. 
A)  of their work with experimental economics. 
B)  they discovered the first example of a Giffen good. 
C)  of their work on the substitution and income effects of price changes. 
D)  they proved that external economies would lead to market failure.

Question 12

Total utility is constant along a given indifference curve.

Accepted Answer

A) True 
 B)False

Question 13

A consumer's utility-maximizing combination of goods is given by the bundle that corresponds to the point on

Accepted Answer

A)  the indifference curve that intersects the horizontal axis. 
B)  the indifference curve that intersects the vertical axis. 
C)  an indifference curve that is tangent to the budget constraint. 
D)  the budget constraint where it intersects one of the axes. 
A)  the indifference curve that intersects the horizontal axis. 
B)  the indifference curve that intersects the vertical axis. 
C)  an indifference curve that is tangent to the budget constraint. 
D)  the budget constraint where it intersects one of the axes.

Question 14

Most film processing companies have a policy of printing every picture on a roll of film and allowing customers to request a refund for pictures that were not clearly developed. The companies do this knowing that most customers do not ask for refunds. This is an example of consumers

Accepted Answer

A)  failing to ignore sunk costs. 
B)  being overly optimistic about their future behavior. 
C)  not taking nonmonetary opportunity costs into account. 
D)  not making themselves aware of the policy regarding refunds. 
A)  failing to ignore sunk costs. 
B)  being overly optimistic about their future behavior. 
C)  not taking nonmonetary opportunity costs into account. 
D)  not making themselves aware of the policy regarding refunds.

Question 15

During its run on Broadway, the play The Producers regularly sold out all available tickets at the St. James Theater. The theater could have raised ticket prices from $75 to $125 and still sold all available tickets but chose not to do so. The best explanation for this decision is

Accepted Answer

A)  theater owners are unaware of the elasticity of demand for Broadway shows. 
B)  theater owners do not want to raise their tickets on weekends, when demand is high, and then have to lower prices during the week, when demand is lower. 
C)  firms sometimes give up profits in the short run to keep their customers happy and increase their profits in the long run. 
D)  theater owners are not motivated to maximize their profits. 
A)  theater owners are unaware of the elasticity of demand for Broadway shows. 
B)  theater owners do not want to raise their tickets on weekends, when demand is high, and then have to lower prices during the week, when demand is lower. 
C)  firms sometimes give up profits in the short run to keep their customers happy and increase their profits in the long run. 
D)  theater owners are not motivated to maximize their profits.

Question 16

What is behavioral economics?

Accepted Answer

A)  the study of how people make wealth-maximizing decisions 
B)  the study of how people behave in the face of scarcity 
C)  the study of situations in which people act in ways that are not economically rational 
D)  the study of how people make decisions at the margin 
A)  the study of how people make wealth-maximizing decisions 
B)  the study of how people behave in the face of scarcity 
C)  the study of situations in which people act in ways that are not economically rational 
D)  the study of how people make decisions at the margin

Question 17

Table 10-5
  
-Refer to Table 10-5, which lists the values of Harry Taber's marginal utility and marginal utility per dollar for Italian submarine (sub) sandwiches and tacos. Assume that the price of the sub sandwiches is $4 and the price of tacos is $2. When Harry's income is $14 he buys two Italian sub sandwiches and three tacos. The last column lists the values of the marginal utility per dollar for tacos when the price of tacos decreases to $1. Complete this statement: As a result of the change in price, the marginal utility of each taco Harry consumes increases and

Accepted Answer

A)  the substitution effect of the price change will cause Harry to buy more tacos and fewer subs. 
B)  the substitution effect of the price change will cause Harry to buy more tacos if they are a normal good, and fewer tacos if they are an inferior good. 
C)  the substitution effect will cause Harry to buy another sub because his purchasing power has increased. 
D)  the substitution effect will cause Harry to buy fewer tacos. 
A)  the substitution effect of the price change will cause Harry to buy more tacos and fewer subs. 
B)  the substitution effect of the price change will cause Harry to buy more tacos if they are a normal good, and fewer tacos if they are an inferior good. 
C)  the substitution effect will cause Harry to buy another sub because his purchasing power has increased. 
D)  the substitution effect will cause Harry to buy fewer tacos.

Question 18

Economists usually assume that people act in a rational, self-interested way. In explaining how consumers make choices, this means that economists believe

Accepted Answer

A)  consumers will always buy goods and services at the lowest possible prices. 
B)  consumers spend their incomes to order to accumulate the most goods and services. 
C)  consumers make choices that will leave them as satisfied as possible given their incomes, tastes and the prices of goods and services available to them. 
D)  consumers will spend their incomes and time on activities that benefit themselves as much as possible, without regard to the welfare of others. 
A)  consumers will always buy goods and services at the lowest possible prices. 
B)  consumers spend their incomes to order to accumulate the most goods and services. 
C)  consumers make choices that will leave them as satisfied as possible given their incomes, tastes and the prices of goods and services available to them. 
D)  consumers will spend their incomes and time on activities that benefit themselves as much as possible, without regard to the welfare of others.

Question 19

Figure 10-4  
-Refer to Figure 10-4. What is the marginal rate of substitution between g and h?

Accepted Answer

A)    cookie. 
B)    cookie. 
C)  2 cookies. 
D)  3 cookies. 
A)    cookie. 
B)    cookie. 
C)  2 cookies. 
D)  3 cookies.

Question 20

In explaining consumer behavior economists explain how consumer tastes and preferences are formed.

Accepted Answer

A) True 
 B)False

Exam 10: Consumer Choice and Behavioral Economics

The substitution effect of an increase in the price of Raisin Bran refers to

Utility is

The substitution effect of an increase in the price of peaches is

Some economists have argued that path dependence and switching costs can lead to market failure. Which of the following is an example of this argument?

The demand for a Giffen good slopes upward.

Which of the following statements about utility and preferences is false?

Most people would prefer to drive a luxury car that has all the options, but more people buy less expensive cars even though they could afford the luxury car because

If Paul decides to buy a $60 ticket to a Cirque du Soleil show rather than a $45 ticket for a Blue Man Group performance, we can conclude that

A common mistake made by consumers is the failure to take into account the monetary costs of their actions.

Maurice Allais, Reinhard Selten and Vernon Smith all were awarded the Nobel Prize in Economics in part because

Total utility is constant along a given indifference curve.

A consumer's utility-maximizing combination of goods is given by the bundle that corresponds to the point on

Most film processing companies have a policy of printing every picture on a roll of film and allowing customers to request a refund for pictures that were not clearly developed. The companies do this knowing that most customers do not ask for refunds. This is an example of consumers

During its run on Broadway, the play The Producers regularly sold out all available tickets at the St. James Theater. The theater could have raised ticket prices from $75 to $125 and still sold all available tickets but chose not to do so. The best explanation for this decision is

What is behavioral economics?

Economists usually assume that people act in a rational, self-interested way. In explaining how consumers make choices, this means that economists believe

Figure 10-4 -Refer to Figure 10-4. What is the marginal rate of substitution between g and h?

In explaining consumer behavior economists explain how consumer tastes and preferences are formed.

Economics: Foundations and Models

Trade-Offs, Comparative Advantage, and the Market System

Where Prices Come From: the Interaction of Demand and Supply

Economic Efficiency, Government Price Setting, and Taxes

Externalities, Environmental Policy, and Public Goods

Elasticity: the Responsiveness of Demand and Supply

The Economics of Health Care

Firms, the Stock Market, and Corporate Governance

Comparative Advantage and the Gains From International Trade

Technology, Production, and Costs

Firms in Perfectly Competitive Markets

Monopolistic Competition: the Competitive Model in a More Realistic Setting

Oligopoly: Firms in Less Competitive Markets

Monopoly and Antitrust Policy

Pricing Strategy

The Markets for Labor and Other Factors of Production

Public Choice, Taxes, and the Distribution of Income

GDP: Measuring Total Production and Income

Unemployment and Inflation

Economic Growth, the Financial System, and Business Cycles

Long-Run Economic Growth: Sources and Policies

Aggregate Expenditure and Output in the Short Run

Aggregate Demand and Aggregate Supply Analysis

Money, Banks, and the Federal Reserve System

Monetary Policy

Fiscal Policy

Inflation, Unemployment, and Federal Reserve Policy

Macroeconomics in an Open Economy

The International Financial System

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