Deck 4: Consumer and Firm Behavior: The Work–Leisure Decision and Profit Maximization

Question 1

A good is inferior for a consumer if

A) it is never included in his or her consumption bundle.
B) its consumption rises when income rises.
C) its consumption falls when income rises.
D) some minimal level of the good must be consumed to assure the consumer's survival.
E) the assumption of "more is always preferred to less" holds.

Answer 1

its consumption falls when income rises.

Question 2

A utility function

A) needs to measure the absolute level of happiness.
B) needs to measure relative amounts of happiness for a single individual.
C) helps compare the relative happiness of two separate consumers.
D) is most useful if it can be influenced by others.
E) measures relative happiness and income of consumers.

Answer 2

needs to measure relative amounts of happiness for a single individual.

Question 3

A utility function

A) is a stand-in for a more complicated function.
B) is useful only in microeconomics, not macroeconomics.
C) captures the preferences of the representative household over consumption and leisure goods.
D) captures the representative firm's ability to produce goods and services.
E) captures the maximum satisfaction of consumers.

Answer 3

captures the preferences of the representative household over consumption and leisure goods.

Question 4

The consumer's work-leisure choice problem focuses on how a consumer's work-leisure decision is affected by the consumer's

A) preferences and productivity.
B) productivity and psychology.
C) psychology and preferences.
D) preferences and constraints.
E) Preferences and psychology.

Question 5

A static decision is one that

A) is made very slowly.
B) involves planning over one time period.
C) involves planning over exactly two time periods.
D) involves planning over more than one time period.
E) involves only the present.

Question 6

An indifference curve is best defined as

A) a boundary line between attainable and unattainable choices.
B) is a concave curve which ranks preferred consumption bundles.
C) a boundary line defining production possibilities.
D) the set of all bundles that the consumer enjoys equally well.
E) the level of consumption where a consumer is indifferent to receiving more consumption.

Question 7

We assume that the representative consumer's preferences exhibit the properties that

A) they be convex and that more is always preferred to less.
B) more is always preferred to less and that each consumer has one strictly favorite good.
C) each consumer has one strictly preferred good and that consumption and leisure are both normal goods.
D) that consumption and leisure are both normal goods and that the consumer likes diversity in his or her consumption bundle.
E) more is always preferred to less and that consumers do not like diversity in his or her consumption bundle.

Question 8

We assume that the representative consumer's preferences exhibit the properties that

A) they evolve over time and that more is always preferred to less.
B) more is preferred to less and that the consumer prefers diversity.
C) the consumer likes diversity and that more is sometimes preferred to less.
D) more is sometimes preferred to less and that consumption and leisure are both normal goods.
E) less consumption is preferred to more leisure and that consumption and leisure are both normal goods.

Question 9

A good is normal for a consumer if

A) it is always consumed in a consistent quantity.
B) its consumption rises when income rises.
C) its consumption falls when income rises.
D) some minimal level of the good must be consumed to assure the consumer's survival.
E) the assumption of "more is always preferred to less" holds.

Question 10

An indifference curve

A) connects a set of consumption bundles among which the consumer is indifferent.
B) is only useful in analyzing apathetic consumers.
C) connects a set of consumers who each have the same preferences.
D) is only useful in microeconomics.
E) connects a set of consumption and income bundles among which the consumer is indifferent.

Question 11

Two key properties of indifference curves are that an indifference curve slopes

A) upward and is bowed out from the origin.
B) downward and is bowed out from the origin.
C) upward and is bowed in toward the origin.
D) downward and is bowed in toward the origin.
E) downward and is concave from the origin.

Question 12

The preferences of the representative consumer over consumption and leisure are represented by use of a

A) production function.
B) utility function.
C) benefit function.
D) preference function.
E) dynamic function.

Question 13

A dynamic decision is one that

A) is made very quickly.
B) involves only the present.
C) involves only the future.
D) involves planning over more than one time period.
E) involved planning over exactly two time periods.

Question 14

A consumption bundle

A) is a particular combination of consumption and leisure.
B) only measures a quantity of goods and services, but not the amount of leisure.
C) is a method of bringing home consumption goods.
D) measures the quality of a particular good.
E) is a particular combination of work and leisure.

Question 15

For macroeconomic purposes,it is assumed that all consumers in the economy

A) are diverse.
B) are not identical.
C) are identical.
D) exhibit differences.
E) exhibit different preferences.

Question 16

A consumer is said to be indifferent between two consumption bundles

A) when the consumer doesn't care about his or her consumption bundle.
B) when the two bundles provide equal amounts of utility.
C) when the consumer chooses the bundles equally often.
D) when the consumer is indecisive.
E) when the consumption bundles contain normal goods.

Question 17

We typically assume that

A) both consumption and leisure are normal goods.
B) consumption is a normal good and leisure is an inferior good.
C) consumption is an inferior good and leisure is a normal good.
D) both consumption and leisure are inferior goods.
E) both consumption and leisure and complimentary goods.

Question 18

In macroeconomic analysis,the representative consumer

A) denotes the consumer with the average amount of income.
B) plays the role of a stand-in for all consumers in the economy.
C) is the consumer who bargains with firms for all workers in the economy.
D) is always a misleading fiction.
E) is the consumer with an average standard of living.

Question 19

"More is always preferred to less" refers to

A) choices between work and leisure.
B) choices between happiness and utility.
C) choices between consumption and work.
D) choices between consumption and leisure.
E) more consumption and less leisure.

Question 20

The principle that consumers and firms optimize

A) is not helpful because some economic agents may behave irrationally.
B) is helpful because it allows us to analyze how economic agents respond to changes in their environment.
C) only applies to perfectly competitive markets.
D) is helpful because it determines the available technology.
E) is explained by their work-leisure choices.

Question 21

Convexity of the indifference curve follows from

A) the fact that more is preferred to less.
B) the fact that consumption and leisure are normal goods.
C) the fact that consumers are indifferent to consumption and leisure goods.
D) the fact that consumers prefer diversity.
E) the fact that income plays a significant role in consumption and leisure decisions.

Question 22

Moving down the indifference curve,the marginal rate of substitution

A) is constant.
B) is rising.
C) diminishes.
D) is highly volatile.
E) depends on household income.

Question 23

That indifference curves are bowed in toward the origin

A) is not true.
B) follows from the fact that more is preferred to less.
C) follows from the property that the consumer likes diversity in his or her consumption bundle.
D) follows from the property that consumption and leisure are normal goods.
E) follows from the fact that there is a direct relationship between consumption and leisure bundles.

Question 24

The marginal rate of substitution is defined as

A) the amount of good Y substituted for good X by a consumer.
B) the amount of good Y that a consumer is willing to substitute for good X and stay at a given level of satisfaction.
C) the feasible rate of substitution given prices.
D) the slope of the utility function.
E) the convexity of the indifference curve.

Question 25

The shape of the indifference curve depends on

A) the price of goods.
B) the family income.
C) the substitutability between goods for the household.
D) the level of happiness for the household.
E) the relative price of good Y.

Question 26

The marginal rate of substitution

A) can be computed by measuring the slope of the indifference curve.
B) can be computed by measuring the curvature of the indifference curve.
C) cannot be deduced from the properties of the indifference curve.
D) can only be computed if we know the prices of all goods.
E) can be deduced from the budget line.

Question 27

The time constraint for the consumer is

A) the amount of time for decision making.
B) expressed as leisure time - time spent working = total time available.
C) expressed as leisure time - sleep time = time spent working.
D) expressed as leisure time + time spent working = total time available.
E) a result of consumers' busy work schedule.

Question 28

In a one-period economy

A) consumption equals disposable income.
B) consumption equals disposable income plus the value of non-market work.
C) savings is always positive.
D) consumers may increase their consumption by borrowing.
E) consumers save more than they consume.

Question 29

In practice,

A) taxes are not lump sum taxes.
B) real wages affect the level of lump sum taxes.
C) the quantity of profits that the consumer received is dictated by lump sum taxes.
D) lump sum taxes affect the effective prices that consumers face in the market.
E) taxes have no distortionary effect.

Question 30

The slope of the indifference curve is defined as

A) the marginal rate of substitution.
B) the marginal rate of transformation.
C) the marginal propensity to consume.
D) the marginal propensity to substitute.
E) the relative price of good Y.

Question 31

In a one-period economy,real consumption

A) is always less than disposable income.
B) is typically greater than disposable income.
C) is exactly equal to disposable income.
D) can be greater than, less than, or equal to disposable income.
E) can be less than savings.

Question 32

The representative consumer acts competitively

A) when he or she can haggle for a lower price.
B) when he or she is a price-taker.
C) when he or she is a price-maker.
D) if the consumer is large relative to the size of the market.
E) when he or she has to make decisions regarding work and leisure.

Question 33

When consumers act as price-takers,we say that they behave

A) cooperatively.
B) competitively.
C) monopsonistically.
D) irrationally.
E) rationally.

Question 34

The property of diminishing marginal rate of substitution follows from the property that the indifference curve is

A) downward sloping.
B) upward sloping.
C) bowed in toward the origin.
D) bowed out from the origin.
E) concave from the origin.

Question 35

A barter economy

A) cannot be a market economy.
B) is an economy without monetary exchange.
C) is an economy with no business firms.
D) is not a competitive economy.
E) is a competitive economy.

Question 36

An economy without monetary exchange is called

A) a primitive economy.
B) a barter economy.
C) a socialist economy.
D) an autarky economy.
E) a perfectly competitive economy.

Question 37

A consumer's real disposable income equals

A) wage income plus consumption expenditures.
B) wage income plus profit income minus taxes.
C) total income minus profit income minus taxes.
D) total income minus wage income minus taxes.
E) consumption plus savings minus taxes.

Question 38

A lump-sum tax is a tax that

A) can be avoided by strategic behaviour.
B) does not depend on the actions of the economic agent being taxed.
C) does not depend on the actions of the government.
D) distorts economic decisions.
E) depends on the quantity of taxable goods consumers purchase.

Question 39

That indifference curves are downward sloping

A) is not true.
B) follows from the fact that more is preferred to less.
C) follows from the property that the consumer likes diversity in his or her consumption bundle.
D) follows from the property that consumption and leisure are normal goods.
E) follows from the fact that there is a direct relationship between consumption and leisure bundles.

Question 40

The real wage denotes

A) the number of units of consumption goods that can be exchanged for one unit of labour time.
B) the number of units of labour time that can be exchanged for one unit of consumption goods.
C) the number of units of labour time that can be exchanged for one unit of leisure time.
D) the number of units of leisure time that can be exchanged for one unit of labour time.
E) the purchasing power of income earned after taxes are paid.

Question 41

The construct of a representative firm is most helpful in describing the behavior of all of the firms in the economy when

A) there are constant returns to scale.
B) there are increasing returns to scale.
C) there are decreasing returns to scale.
D) the marginal product of labour is increasing in the amount of labour input.
E) the marginal product of labour is decreasing in the amount of labour input.

Question 42

An increase in real dividend income minus taxes represents

A) a pure substitution effect.
B) a pure income effect.
C) a combination of income and substitution effects.
D) neither a pure income effect nor a pure substitution effect.
E) an income effect which is greater than the substitution effect.

Question 43

An increase in the real wage

A) unambiguously increases consumption and increases labour supply.
B) increases consumption and has an ambiguous effect on labour supply.
C) has an ambiguous effect on consumption and increases labour supply.
D) has an ambiguous effect on both consumption and labour supply.
E) increases consumption and decreases labour supply.

Question 44

In the goal of consumer optimization,it is assumed that

A) consumption equals disposable income.
B) savings are positive.
C) more is preferred to less.
D) the consumer is rational.
E) the consumer consumes more than his or her disposable income.

Question 45

The marginal product of a factor of production

A) is equal to the ratio of the amount that factor of production to the amount of output produced.
B) is equal to the amount of additional output that can be produced with one additional unit of each factor input.
C) is equal to the amount of additional output that can be produced with one additional unit of that factor input, holding constant the quantities of the other factor inputs.
D) always exceeds the average product of that factor input, holding constant the quantities of the other factor inputs.
E) is equal to the additional output that can be produced with an additional change in total factor productivity.

Question 46

Constant returns to scale means that,given any constant x > 0,

A) xY = zF(xK, xNd).
B) xY > zF(xK, xNd).
C) xY < zF(xK, xNd).
D) xY = ZxF(K, Nd).
E) xY = xzF(xF, xNd).

Question 47

Perfect complements will have

A) straight line indifference curves.
B) reverse L-shaped indifference curves.
C) L-shaped indifference curves.
D) curved indifference curves, bowed in from the origin.
E) curved indifference curve, bowed out from the origin.

Question 48

When consumption and leisure are both normal goods,an increase in real dividend income minus taxation,the rational consumer

A) increases consumption and increases labour supply.
B) increases consumption and reduces labour supply.
C) reduces consumption and increases labour supply.
D) reduces consumption and reduces labour supply.
E) increases consumption and savings

Question 49

In the production function,Y = zF(K,Nd),total factor productivity is

A) Y/K.
B) Y/ Nd.
C) F/Y.
D) z.
E) Y/Z.

Question 50

Perfect substitutes will have

A) straight line indifference curves.
B) reverse L-shaped indifference curves.
C) L-shaped indifference curves.
D) curved indifference curves, bowed in from the origin.
E) curved indifference curve, bowed out from the origin.

Question 51

The vertical intercept of the consumer's budget line is equal

A)
B)
C)
D)
E)

Question 52

A consumer maximizes satisfaction at the point where his subjective valuation of good X measured as the amount of good Y he or she is willing to give up to obtain an additional unit of X equals

A) the slope of the indifference curve through that point.
B) one over the slope of the indifference curve through that point.
C) Px / Py.
D) Py / Px.
E) Y / Px.

Question 53

At the optimal consumption bundle,the marginal rate of substitution of leisure for consumption is equal to

A) the real wage and the budget line is tangent to an indifference curve.
B) minus the real wage and the budget line is tangent to the indifference curve.
C) the real wage and the budget line intersects the indifference curve..
D) minus the real wage and the budget line intersects the indifference curve.
E) the real wage and on the highest possible indifference curve.

Question 54

When consumption and leisure are both normal goods,an increase in real dividend income minus taxation,the rational consumer

A) increases consumption and increases leisure.
B) increases consumption and reduces leisure.
C) reduces consumption and increases leisure.
D) reduces consumption and reduces leisure..
E) increases consumption and increases work.

Question 55

In a one-period economy,the expression for the budget constraint is

A)
B)
C)
D)
E)

Question 56

A production function describes the

A) technological possibilities for converting factor inputs into outputs.
B) intellectual possibilities for converting factor inputs into outputs.
C) amount of resources available to the representative firm.
D) actual process of converting factor inputs into outputs.
E) the amount of labour available to produce outputs.

Question 57

The optimal consumption bundle is the point representing a consumption-leisure pair that is on the

A) lowest possible indifference curve and is on or outside the consumer's budget constraint.
B) lowest possible indifference curve and is on or inside the consumer's budget constraint.
C) highest possible indifference curve and is on or outside the consumer's budget constraint.
D) highest possible indifference curve and is on or inside the consumer's budget constraint.
E) lowest possible indifference curve that maximizes total utility.

Question 58

A defense for the assumption that consumers maximize is that

A) consumers never make mistakes.
B) mistakes by the consumer are not likely to last for a long time.
C) it allows for many possible outcomes.
D) mistaken consumers may receive counseling from the government.
E) mistakes by consumers only last for two periods.

Question 59

An increase in the real wage

A) represents a pure substitution effect.
B) represents a pure income effect.
C) represents a combination of income and substitution effects.
D) causes a parallel shift in the consumer's budget line.
E) leads to no change in labour supply.

Question 60

With consumption on the vertical axis and leisure on the horizontal axis,the slope of the budget line is equal to

A)
B)
C)
D)
E)

Question 61

The following question(s) deal with The Gizmo Company, which has the following production function:

If the real wage is equal to 8 widgets,and only an integer number of workers can be hired,the Gizmo company should hire

A) 2 workers.
B) 3 workers.
C) 4 workers.
D) 5 workers.
E) 6 workers.

Question 62

Suppose Ford could triple production of Mustangs by tripling its production facilities for those cars.This is an example of

A) constant returns to scale.
B) increasing returns to scale.
C) decreasing returns to scale.
D) the law of diminishing returns.
E) diminishing marginal rate of substitution.

Question 63

The following question(s) deal with the Widget Company, which produces widgets. Widgets are produced according to:

If the real wage is equal to 7 widgets,and only an integer number of workers can be hired,the Widget company should hire

A) 2 workers.
B) 3 workers.
C) 4 workers.
D) 5 workers.
E) 6 workers.

Question 64

Of the following,which is the least likely example of an increase in total factor productivity?

A) the introduction of the assembly line
B) the invention of the personal computer
C) good weather
D) a reduction in the relative price of energy
E) an educated work force

Question 65

The following question(s) deal with The Gizmo Company, which has the following production function:

The marginal product of the fourth gizmo worker hired is

A) 1.
B) 3.
C) 5.
D) 10.
E) 12.

Question 66

An increase in total factor productivity shifts the production function

A) upward and increases the marginal product of labour.
B) upward and decreases the marginal product of labour.
C) downward and increases the marginal product of labour.
D) downward and decreases the marginal product of labour.
E) upward and increases the marginal product of capital.

Question 67

As the quantity of capital increases,the marginal product of capital

A) is constant.
B) increases.
C) decreases.
D) may either increase or decrease.
E) gets more expensive.

Question 68

The Solow residual is a measure of

A) average labour productivity.
B) average capital productivity.
C) total factor productivity.
D) the rate of growth of real GDP.
E) the marginal product of labour.

Question 69

As the quantity of capital increases,the marginal product of labour

A) is constant.
B) increases.
C) decreases.
D) may either increase or decrease.
E) gets more expensive.

Question 70

As the quantity of labour increases,the marginal product of labour

A) is constant.
B) increases.
C) decreases.
D) may either increase or decrease.
E) gets more expensive.

Question 71

The following question(s) deal with the Widget Company, which produces widgets. Widgets are produced according to:

The marginal product of the second widget worker hired is

A) 2.
B) 8.
C) 10.
D) 12.
E) 22.

Question 72

An increase in total factor productivity

A) changes neither the slope nor the position of the production function.
B) changes the slope but not the position of the production function.
C) changes the position but not the slope of the production function.
D) changes both the slope and the position of the production function.
E) keeps the marginal product of labour constant.

Question 73

The profit-maximizing quantity of labour equates the marginal product of labour with

A) total factor productivity.
B) the marginal product of capital.
C) the real wage.
D) the average product of labour.
E) the slope of the production function.

Question 74

What are income and substitution effects? What are the income and substitution effects from an increase in the real wage?