Question 1

Suppose a consumer spends his income on CDs and DVDs. If his income decreases, the budget constraint for CDs and DVDs will

Accepted Answer

A)  shift outward, parallel to the original budget constraint. 
B)  shift inward, parallel to the original budget constraint. 
C)  rotate outward along the CD axis because he can afford more CDs. 
D)  rotate outward along the DVD axis because he can afford more DVDs. 
A)  shift outward, parallel to the original budget constraint. 
B)  shift inward, parallel to the original budget constraint. 
C)  rotate outward along the CD axis because he can afford more CDs. 
D)  rotate outward along the DVD axis because he can afford more DVDs.

Question 2

All points on a demand curve are optimal consumption points.

Accepted Answer

A) True 
 B)False

Question 3

A consumer chooses an optimal consumption point where the

Accepted Answer

A)  marginal rate of substitution equals the relative price ratio. 
B)  slope of the indifference curve equals the slope of the budget constraint. 
C)  ratio of the marginal utilities equals the ratio of the prices. 
D)  All of the above are correct. 
A)  marginal rate of substitution equals the relative price ratio. 
B)  slope of the indifference curve equals the slope of the budget constraint. 
C)  ratio of the marginal utilities equals the ratio of the prices. 
D)  All of the above are correct.

Question 4

The substitution effect of a price change is the change in consumption that results from the movement to a new indifference curve.

Accepted Answer

A) True 
 B)False

Question 5

The consumer's optimal choice is the one in which the marginal utility per dollar spent on good X is

Accepted Answer

A)  equal to the marginal utility per dollar saved on good X. 
B)  greater than the marginal utility per dollar spent on good Y. 
C)  equal to the marginal utility per dollar spent on good Y. 
D)  less than the marginal utility per dollar spent on good Y. 
A)  equal to the marginal utility per dollar saved on good X. 
B)  greater than the marginal utility per dollar spent on good Y. 
C)  equal to the marginal utility per dollar spent on good Y. 
D)  less than the marginal utility per dollar spent on good Y.

Question 6

Figure 21-2
The downward­sloping line on the figure represents a consumer's budget constraint.  
-Refer to Figure 21-2. Which of the following statements is not correct?

Accepted Answer

A)  Points W, X, and Y all cost the consumer the same amount of money. 
B)  Point Z is unaffordable for the consumer given his budget constraint. 
C)  Point V costs less than point Z. 
D)  Points W, X, and Y give the consumer the same level of satisfaction. 
A)  Points W, X, and Y all cost the consumer the same amount of money. 
B)  Point Z is unaffordable for the consumer given his budget constraint. 
C)  Point V costs less than point Z. 
D)  Points W, X, and Y give the consumer the same level of satisfaction.

Question 7

Figure 21-17  
-Refer to Figure 21-17. When the price of X is $40, the price of Y is $40, and income is $160, Paul's optimal choice is point B. Then Paul's income increases to $320, and his optimal choice is point E. For Paul,

Accepted Answer

A)  good X is a normal good, and good Y is an inferior good. 
B)  good X is an inferior good, and good Y is a normal good. 
C)  both good X and good Y are normal goods. 
D)  good Y is a normal good; good X is neither a normal nor an inferior good. 
A)  good X is a normal good, and good Y is an inferior good. 
B)  good X is an inferior good, and good Y is a normal good. 
C)  both good X and good Y are normal goods. 
D)  good Y is a normal good; good X is neither a normal nor an inferior good.

Question 8

Figure 21-5
(a) (b)    
-Refer to Figure 21-5. In graph (b), if income is equal to $420, then the price of good Y is

Accepted Answer

A)  $1. 
B)  $3. 
C)  $10. 
D)  $30. 
A)  $1. 
B)  $3. 
C)  $10. 
D)  $30.

Question 9

Jordan is planning ahead for retirement and must decide how much to spend and how much to save while he's working in order to have money to spend when he retires. When the income effect dominates the substitution effect, an increase in the interest rate on savings will cause him to

Accepted Answer

A)  decrease his savings rate. 
B)  increase his savings rate. 
C)  continue saving at the current rate. 
D)  Any of the above could be correct. 
A)  decrease his savings rate. 
B)  increase his savings rate. 
C)  continue saving at the current rate. 
D)  Any of the above could be correct.

Question 10

Scenario 21-4 Frank spends all of his income of $240 per month on shirts and hats. The price of a shirt is $40 and the price of a hat is $30.
-Refer to Scenario 21-4. If Frank uses all of his income to buy hats during a certain month, then how many hats does he buy?

Accepted Answer

Frank buys

Question 11

Suppose that you have $100 today and expect to receive $100 one year from today. Your money market account pays an annual interest rate of 25%, and you may borrow money at that interest rate. Consider the budget constraint between "spending today" on the horizontal axis and "spending a year from today" on the vertical axis. What is the slope of this budget constraint?

Accepted Answer

A)  -0.75 
B)  -1.00 
C)  -1.25 
D)  -2.25 
A)  -0.75 
B)  -1.00 
C)  -1.25 
D)  -2.25

Question 12

Figure 21-8  
-Refer to Figure 21-8. If the price of good X is $5, and your budget constraint is DE, what is the price of good Y?

Accepted Answer

A)  $10 
B)  $5 
C)  $2.50 
D)  $1.67 
A)  $10 
B)  $5 
C)  $2.50 
D)  $1.67

Question 13

Which of the following descriptions best depicts the substitution effect?

Accepted Answer

A)  the change in consumption resulting from a change in the consumer's income, holding the prices of the goods constant 
B)  the change in consumption resulting from a change in the consumer's income, holding the consumer's level of satisfaction constant 
C)  the change in consumption resulting from a change in the price of one good, holding the consumer's level of satisfaction constant 
D)  the change in consumption resulting from a change in the price of one good, allowing the consumer's level of satisfaction to change 
A)  the change in consumption resulting from a change in the consumer's income, holding the prices of the goods constant 
B)  the change in consumption resulting from a change in the consumer's income, holding the consumer's level of satisfaction constant 
C)  the change in consumption resulting from a change in the price of one good, holding the consumer's level of satisfaction constant 
D)  the change in consumption resulting from a change in the price of one good, allowing the consumer's level of satisfaction to change

Question 14

For Brent, the income effect of a wage increase is stronger than the substitution effect. In response to a wage increase, will Brent work more hours or will he work fewer hours?

Accepted Answer

In response to a wag

Question 15

Figure 21-30
The graph shows two budget constraints for a consumer.  
-Refer to Figure 21-30. Suppose Budget Constraint B applies. If the consumer's income is $90 and if he is buying 5 light bulbs, then how much money is he spending on hamburgers?

Accepted Answer

If income is $90, then the price of a li

Question 16

Which of the following is an example of a Giffen good?

Accepted Answer

A)  potatoes during the Irish potato famine 
B)  rice in the Chinese province of Hunan 
C)  fish in Japan 
D)  Both a and b are correct. 
A)  potatoes during the Irish potato famine 
B)  rice in the Chinese province of Hunan 
C)  fish in Japan 
D)  Both a and b are correct.

Question 17

When indifference curves are bowed inward, the marginal rate of substitution varies at each point on the indifference curve.

Accepted Answer

A) True 
 B)False

Question 18

The income effect in the work-leisure model induces a person to work less in response to higher wages, which tends to make the labor-supply curve slope backward.

Accepted Answer

A) True 
 B)False

Question 19

Suppose Reta is planning for retirement in a two-period world. In the first period Reta is young and earns $1 million, and in the second period Reta is old and retired and earns nothing. The interest rate is initially 10 percent, but then it falls to 7 percent. After the interest rate falls, the

Accepted Answer

A)  substitution effect will induce Reta to consume more when she is young. 
B)  substitution effect will induce Reta to consume less when she is young. 
C)  income effect will induce Reta to consume more when she is young. 
D)  change in interest rates affects the substitution effect but not the income effect. 
A)  substitution effect will induce Reta to consume more when she is young. 
B)  substitution effect will induce Reta to consume less when she is young. 
C)  income effect will induce Reta to consume more when she is young. 
D)  change in interest rates affects the substitution effect but not the income effect.

Question 20

Figure 21-3
In each case, the budget constraint moves from BC-1 to BC-2.  
-Refer to Figure 21-3. Which of the graphs in the figure reflects an increase in the price of good Y only?

Accepted Answer

A)  graph a 
B)  graph b 
C)  graph c 
D)  graph d 
A)  graph a 
B)  graph b 
C)  graph c 
D)  graph d

Exam 21: The Theory of Consumer Choice

Suppose a consumer spends his income on CDs and DVDs. If his income decreases, the budget constraint for CDs and DVDs will

All points on a demand curve are optimal consumption points.

A consumer chooses an optimal consumption point where the

The substitution effect of a price change is the change in consumption that results from the movement to a new indifference curve.

The consumer's optimal choice is the one in which the marginal utility per dollar spent on good X is

Figure 21-2 The downward­sloping line on the figure represents a consumer's budget constraint. -Refer to Figure 21-2. Which of the following statements is not correct?

Figure 21-17 -Refer to Figure 21-17. When the price of X is $40, the price of Y is $40, and income is $160, Paul's optimal choice is point B. Then Paul's income increases to $320, and his optimal choice is point E. For Paul,

Figure 21-5 (a) (b) -Refer to Figure 21-5. In graph (b), if income is equal to $420, then the price of good Y is

Jordan is planning ahead for retirement and must decide how much to spend and how much to save while he's working in order to have money to spend when he retires. When the income effect dominates the substitution effect, an increase in the interest rate on savings will cause him to

Scenario 21-4 Frank spends all of his income of $240 per month on shirts and hats. The price of a shirt is $40 and the price of a hat is $30. -Refer to Scenario 21-4. If Frank uses all of his income to buy hats during a certain month, then how many hats does he buy?

Figure 21-8 -Refer to Figure 21-8. If the price of good X is $5, and your budget constraint is DE, what is the price of good Y?

Which of the following descriptions best depicts the substitution effect?

For Brent, the income effect of a wage increase is stronger than the substitution effect. In response to a wage increase, will Brent work more hours or will he work fewer hours?

Figure 21-30 The graph shows two budget constraints for a consumer. -Refer to Figure 21-30. Suppose Budget Constraint B applies. If the consumer's income is $90 and if he is buying 5 light bulbs, then how much money is he spending on hamburgers?

Which of the following is an example of a Giffen good?

When indifference curves are bowed inward, the marginal rate of substitution varies at each point on the indifference curve.

The income effect in the work-leisure model induces a person to work less in response to higher wages, which tends to make the labor-supply curve slope backward.

Suppose Reta is planning for retirement in a two-period world. In the first period Reta is young and earns $1 million, and in the second period Reta is old and retired and earns nothing. The interest rate is initially 10 percent, but then it falls to 7 percent. After the interest rate falls, the

Figure 21-3 In each case, the budget constraint moves from BC-1 to BC-2. -Refer to Figure 21-3. Which of the graphs in the figure reflects an increase in the price of good Y only?

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

Six Debates Over Macroeconomic Policy

Filters

Figure 21-2 The downwardsloping line on the figure represents a consumer's budget constraint. -Refer to Figure 21-2. Which of the following statements is not correct?