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

Question 1

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.

Answer 1

plays the role of a stand-in for all consumers in the economy.

Question 2

We consider the preferences of the consumer because

A) we want to understand the consumer's reaction to changing circumstances.
B) we want to determine the best marketing strategy.
C) the government wants to make the best consumption and leisure choice.
D) the firm needs to determine what to produce.

Answer 2

we want to understand the consumer's reaction to changing circumstances.

Question 3

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.

Answer 3

is helpful because it allows us to analyze how economic agents respond to changes in their environment.

Question 4

The utility function captures

A) how consumers interact.
B) how an individual consumer ranks consumption bundles.
C) how output is produced from labor and capital inputs.
D) how happy a consumer is about a given consumption bundle.

Question 5

In the (consumption,leisure)space,indifference curves as we have assumed them are

A) downward sloping and bowed out of the origin.
B) downward sloping and bowed towards the origin.
C) upward sloping and bowed out of the origin.
D) upward sloping and bowed towards the origin.

Question 6

In the one-period model,what do we assume about household preferences?

A) Households prefer more to less.
B) Households like money.
C) Households dislike taxes.
D) Households care about others.

Question 7

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.

Question 8

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.

Question 9

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.

Question 10

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.

Question 11

The consumer wants to work because he/she

A) is told to work.
B) likes to work.
C) likes leisure.
D) wants the income.

Question 12

It is useful to assume that there is a single representative consumer because

A) this is realistic.
B) this is a useful abstraction if we are interested in problems where distribution effects are not important.
C) this is the only model we know how to work with.
D) a model with one consumer is the same as one with many consumers.

Question 13

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.

Question 14

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

A) they are 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) consumption and leisure are both normal goods and that the consumer likes diversity in his or her consumption bundle.

Question 15

Leisure includes all of the following except

A) sleep.
B) home yardwork.
C) market work.
D) recreational activities.

Question 16

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.

Question 17

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.

Question 18

We use indifference curves because

A) households on average do not care.
B) they help represent preferences.
C) households sometimes make mistakes.
D) they formalize the production process.

Question 19

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.

Question 20

The indifference map

A) shows that the consumer is indifferent among all consumption bundles.
B) is an individual indifference curve.
C) captures the same information as the utility function.
D) is impossible to derive from the utility function.

Question 21

An economy without monetary exchange is called

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

Question 22

Which of the following is false?

A) a lump-sum tax does not depend on any action taken by a consumer.
B) in practice, no taxes are lump-sum.
C) lump-sum taxes are realistic.
D) all taxes have distorting effects on the behavior of economic agents.

Question 23

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.

Question 24

In the (consumption,leisure)space,indifference curves as we have assumed them have the property of presenting the highest levels of satisfaction

A) in the north-east corner.
B) in the south-east corner.
C) in the north-west corner.
D) in the south-west corner.

Question 25

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

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

Question 26

The marginal rate of substitution measures

A) the willingness of a consumer to exchange a good with another consumer.
B) the willingness of a consumer to pay the form for a good.
C) the value in dollars of the last unit of good obtained by the consumer.
D) the rate at which a consumer is willing to exchange one good for another.

Question 27

The marginal rate of substitution

A) is minus 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.

Question 28

The fact 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.

Question 29

We assume leisure is a normal good. This implies that

A) an increase in taxes decreases the demand for leisure.
B) households maximize utility.
C) preferences over consumption are well defined.
D) an increase in the wage increases demand for leisure.

Question 30

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.

Question 31

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.

Question 32

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.

Question 33

The fact 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.

Question 34

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.

Question 35

The real wage denotes

A) the number of units of consumption goods that can be exchanged for one unit of labor time.
B) the number of units of labor time that can be exchanged for one unit of consumption goods.
C) the number of units of labor 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 labor time.

Question 36

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.

Question 37

A numeraire is

A) an average good.
B) a tax levied on each consumer.
C) a good used as a unit of account.
D) an optimal bundle of goods.

Question 38

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.

Question 39

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.

Question 40

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.

Question 41

When consumption and leisure are both normal goods,after 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.

Question 42

Saying the consumer is rational means

A) the consumer is a stand-in for all consumers.
B) the consumer is getting rationed.
C) the consumer makes reasonable choices.
D) the consumer makes the best choices.

Question 43

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

A) h + .
B) wh + - T.
C) c + w(l - h).
D) 11ec94a8_4f97_6065_9d3d_9f0977ef49ab_TB3089_11 - T.

Question 44

A positive,pure income effect can be obtained by

A) increasing the real wage.
B) increasing the tax.
C) increasing the dividend.
D) decreasing leisure.

Question 45

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.

Question 46

If dividend income increases,the following does not happen

A) the consumer chooses to consume more leisure.
B) the consumer chooses to consume more consumption goods.
C) the budget constraint shifts to the right.
D) the substitution effect exceeds the income effect.

Question 47

A lump-sum tax is a tax that

A) can be avoided by strategic behavior.
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.

Question 48

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.

Question 49

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

A) increases consumption and increases labor supply.
B) increases consumption and reduces labor supply.
C) reduces consumption and increases labor supply.
D) reduces consumption and reduces labor supply.

Question 50

The household budget constraint may have a kink because

A) there is uncertainty.
B) households prefer diversity.
C) households may substitute consumption for leisure, or the reverse.
D) leisure is limited by the number of available hours.

Question 51

An increase in taxes has the following impact on the budget constraint

A) a parallel move down.
B) a parallel move up.
C) a tilting to the left.
D) a tilting to the right.

Question 52

In a one-period economy,all of the following are equivalent expressions of the budget constraint except

A) C = w(N? + l) + ? - T.
B) C = wN? + ? - T.
C) C = w(h - l) + ? - T.
D) C = wl = wh + ? - T.

Question 53

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.

Question 54

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.

Question 55

A pure positive income shock leads to

A) an increase in leisure and consumption.
B) an increase in leisure and work.
C) an increase in work and consumption.
D) an increase in leisure and taxes.

Question 56

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.

Question 57

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.

Question 58

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.

Question 59

A defense for the assumption that consumers maximize is that

A) consumers never make mistakes.
B) consumers do not consistently make the same mistakes.
C) it allows for many possible outcomes.
D) mistaken consumers may receive counseling from the government.

Question 60

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

A) w.
B) -w.
C)
D) -11ec94a7_4d7a_de74_9d3d_6f9ccdee79d8_TB3089_11

Question 61

The substitution effect measures

A) the responses of quantities to changes in the relative prices of goods.
B) the responses of relative prices to changes in the demand for goods.
C) how two goods can be used for the same purpose.
D) the responses of quantities to changes in the relative qualities of goods.

Question 62

When the wage increases,the substitution effect in the household's choices leads to

A) a decrease in consumption and leisure.
B) a decrease in consumption and an increase in leisure.
C) an increase in consumption and a decrease in leisure.
D) an increase in consumption and leisure.

Question 63

Theoretically,an increase in the real wage

A) increases leisure.
B) decreases leisure.
C) has an ambiguous effect on leisure.
D) has no effect on leisure.

Question 64

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

A) does not change.
B) increases.
C) decreases.
D) may either increase or decrease.

Question 65

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.

Question 66

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

A) is constant.
B) increases.
C) decreases.
D) may either increase or decrease.

Question 67

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

A) Y/K.
B) Y/N?.
C) F/Y.
D) z.

Question 68

The production function is concave in labor because

A) the contribution to production of each additional unit of labor decreases.
B) the marginal product of labor is increasing.
C) the marginal product of capital is decreasing.
D) the labor demand is downward sloping.

Question 69

We are assuming that returns to scale are

A) scalable.
B) constant.
C) increasing.
D) zero.

Question 70

The marginal product of a factor of production

A) is equal to the ratio of the amount of 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.

Question 71

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 labor is increasing in the amount of labor input.

Question 72

When the wage increases,the income effect on the household's choices leads to

A) a decrease in consumption and leisure.
B) a decrease in consumption and an increase in leisure.
C) an increase in consumption and a decrease in leisure.
D) an increase in consumption and leisure.

Question 73

An increase in the real wage

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

Question 74

Labor supply

A) must necessarily increase when the real wage increases.
B) increases if the substitution effect exceeds the income effect.
C) is increasing and then decreasing in the real wage.
D) increases when taxes increase.

Question 75

Capital,K,includes

A) money.
B) machinery.
C) business loans.
D) know-how.

Question 76

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

A) xzF(xK, xNd)= zF(xK, xNd).
B) xzF(xK, xNd) > zF(xK, xNd).
C) xzF(xK, xNd) < zF(xK, xNd).
D) xzF(xK, xNd) = zxF(K, Nd).

Question 77

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

A) is constant.
B) increases.
C) decreases.
D) may either increase or decrease.

Question 78

The production function is concave in capital because

A) the contribution to production of each additional unit of capital decreases.
B) the marginal product of capital is increasing.
C) the marginal product of labor is decreasing.
D) the cost of loans increases with their quantity.

Question 79

The assumption that the marginal product of labor decreases as the labor input increases implies that

A) output decreases as the labor input increases.
B) the wage increases as the labor input increases.
C) the production function is concave.
D) the production function shifts upward.

Question 80

If labor supply is increasing in the real wage,then

A) the substitution effect is larger than the income effect.
B) the income effect is larger than the substitution effect.
C) the production function is increasing in labor.
D) the marginal product of labor is decreasing.