Deck 22: The Theory of Consumer Choice

Question 1

A budget constraint shows the consumption bundles that the consumer can afford, given his income and the prices of the goods.

Answer 1

True

Question 2

To reach a higher indifference curve a consumer must either obtain an income increase or be offered the goods at lower prices.

Answer 2

False

Question 3

Because indifference curves are linear for each type of good, the marginal rate of substitution is the same at all points on a given indifference curve.

Answer 3

False

Question 4

Bundles of goods on a consumer's indifference curve have the same total cost.

Question 5

Indifference curves are downward-sloping and linear.

Question 6

When the price of a good rises, consumers are willing to pay for fewer units, so there is a decrease in demand.

Question 7

A consumer always prefers to be on a higher indifference curve to a lower indifference curve.

Question 8

Consumers are able to select the prices that they pay for commodities.In this sense, a consumer has some control over the budget constraint he/she faces.

Question 9

The slope of a budget constraint is equal to the relative prices of the two goods.

Question 10

The marginal rate of substitution is the rate at which a consumer is willing to trade one good for another.

Question 11

The slope of an indifference curve reflects the consumer's willingness to exchange one commodity for another.

Question 12

A budget constraint shows the bundles of consumption that make the consumer happy.

Question 13

When goods are not easy to substitute for each other, the indifference curves are less bowed, and when goods are easy to substitute, the indifference curves are very bowed.

Question 14

The indifference curve maps out the consumption bundles that give the consumer the same level of satisfaction.

Question 15

The budget constraints shows the different possible combinations of goods that can be consumed at current prices and using all the consumer's income.

Question 16

An increase in income changes the slope of the budget constraint towards the cheaper good.

Question 17

Indifference curves can be used to rank all possible bundles of commodities.

Question 18

The rate at which a consumer is willing to trade one good for the other depends on the amounts of the goods he is already consuming.

Question 19

A consumer who chooses to consume at a point inside her budget constraint will have to borrow money to pay for her consumption.

Question 20

When a consumer's consumption of one good is reduced, consumption of the other good must be reduced to keep the consumer equally happy due to opportunity costs.

Question 21

The marginal rate of substitution is also known as the slope of the budget constraint.

Question 22

If a consumer wants less of a good when his income rises, it is an inferior good.

Question 23

Unless commodities are perfect complements or perfect substitutes, a price change will always result in an income effect.

Question 24

The point at which the indifference curve is tangent to the budget constraint is called an optimum.

Question 25

Economists define utility as a measure of satisfaction that a consumer receives from a bundle of goods.

Question 26

It is plausible for the labour supply curve to slope either upwards or downwards.

Question 27

Second-hand clothing is an example of a normal good.

Question 28

The substitution effect is the change in consumption that results when a price change moves the consumer along the same indifference curve.

Question 29

The theory of consumer choice has limited application to the work-leisure decision, as leisure time does not have a monetary value.

Question 30

If two goods are perfect substitutes, their indifference curves will be right-angled; if two goods are perfect complements, their indifference curves will be linear.

Question 31

For Giffen goods, the income effect dominates the substitution effect.

Question 32

All Giffen goods are also inferior goods.

Question 33

The substitution effect and income effect always reinforce each other.

Question 34

If the budget constraint crosses an indifference curve in two places, both these points will be below the consumer's optimal level of consumption.

Question 35

An increase in income will cause the budget constraint to shift outward and will allow the consumer to be able to choose between two possible optimum choices.

Question 36

The goal of a consumer can be to either maximise utility or to end up on the highest possible indifference curve, since these phrases are synonymous.

Question 37

The income effect is the change in consumption that results when a price change moves the consumer to a higher or lower indifference curve.

Question 38

Giffen goods are characterised by upward sloping indifference curves.

Question 39

If a good is a perfect substitute, then the MRS will be constant no matter how much of any one good the consumer possesses.

Question 40

The optimal level of consumption occurs where the marginal rate of substitution is greater than the sum of the relative price and the consumer has spent all his or hers income.

Question 41

The indifference curves of perfect substitutes are:

A)straight lines
B)at right angles
C)bowed inwards
D)bowed outwards

Question 42

With respect to the utility of the consumer, an in-kind transfer can be equivalent to a cash transfer.

Question 43

When income increases, a budget constraint will:

A)shift inward, parallel to its initial position
B)shift outward, parallel to its initial position
C)pivot around the Y-axis
D)pivot around the X-axis

Question 44

NARRBEGIN: 22-1
Graph 22-1
Refer to Graph 22-1.Which of the points on the graph shown reflects the choice of a consumer who chooses not to spend her entire income?

A)A
B)B
C)C
D)D

Question 45

NARRBEGIN: 22-1
Graph 22-1
Refer to Graph 22-1.A consumer who chooses to spend all of her income will be at point(s):

A)C
B)E
C)C or E
D)A, B or C

Question 46

A consumer who doesn't spend all of her income:

A)would be at a point inside her budget constraint
B)would not be consuming positive quantities of all goods
C)must be consuming at a point where her budget constraint touches one of the axes
D)would be at a point outside of her budget constraint

Question 47

NARRBEGIN: 22-2
Graph 22-2
Refer to Graph 22-2.Which of the graphs shown reflects an increase in the price of good Y?

A)A
B)B
C)C
D)D

Question 48

Amy buys sushi and miso for lunch.Her weekly budget for lunch is $48.If the price of sushi is $1.50 a piece and the price of miso is $1.20 a cup, then during the week Amy could choose to consume:

A)48 sushi pieces and 20 cups of miso
B)25 sushi pieces and 10 cups of miso
C)20 sushi pieces and 15 cups of miso
D)12 sushi pieces and 26 cups of miso

Question 49

A utility-maximising individual will consume a bundle of goods that is:

A)on the budget constraint
B)below the budget constraint
C)either on or below the budget constraint
D)above the budget constraint

Question 50

Which of the following statements about the budget constraint is true? The slope of the budget constraint is:
(i) the rate at which a consumer can trade one good for another
(ii) equal to the slope of the highest indifference curve
(iii) constant

A)(i) only
B)(i) and (ii)
C)(ii) and (iii)
D)(i) and (iii)

Question 51

If an in-kind transfer forces the recipient to consumer more of a good than he would on his own, then the recipient will always prefer a cash transfer.

Question 52

As a general rule, the theory of consumer choice provides insight into the behaviour of:

A)individuals who make unconstrained choices
B)individuals who make constrained choices
C)individuals who are unaware of how to maximise their wellbeing
D)irrational consumers

Question 53

Indifference curves can:

A)cross, but only if one good is a Giffen good
B)cross, but only if one good is an inferior good
C)cross, but only if both goods are inferior goods
D)can never cross

Question 54

The theory of consumer choice provides the foundation for understanding:

A)the structure of production
B)the effect of advertising on brand preferences
C)product demand
D)the most efficient pricing strategy for firms

Question 55

Which of the following statements are true?
I) higher indifference curves are preferred to lower ones
Ii) indifference curves are always downwards sloping
Iii) indifference curves are always bowed inwards (convex)

A)(i) and (ii) only
B)(ii) and (iii) only
C)(i) and (iii) only
D)(i), (ii) and (iii)

Question 56

NARRBEGIN: 22-2
Graph 22-2
Refer to Graph 22-2.Which of the graphs shown reflects an increase in income?

A)A
B)B
C)C
D)D

Question 57

NARRBEGIN: 22-3
Graph 22-3
Refer to Graph 22-3.Using the figure in panel (a), if income is equal to $160, the price of good Y is:

A)$1.20
B)$3.20
C)$2.66
D)$8.00

Question 58

A budget constraint:

A)represents the bundles of consumption that makes a consumer equally happy
B)shows the consumption bundles that a consumer can afford
C)reflects the desire by consumers to increase their income
D)shows the prices that a consumer chooses to pay for products he consumes

Question 59

NARRBEGIN: 22-2
Graph 22-2
Refer to Graph 22-2.Which of the graphs shown reflects a decrease in the price of good X only?

A)A
B)B
C)C
D)D

Question 60

NARRBEGIN: 22-1
Graph 22-1
Refer to Graph 22-1.All of the points identified on the graph shown represent possible consumption options with the exception of:

A)none
B)C
C)D
D)E

Question 61

NARRBEGIN: 22-4
Graph 22-4
Refer to Graph 22-4.Based on this graph, which of the following statements is correct?

A)point A is valued more than point B
B)point B is valued the same as point E
C)the bundle associated with point D contains more croissants than that associated with point
D)the bundles along indifference curve I1 are preferred to those along indifference curve I2

Question 62

NARRBEGIN: 22-4
Graph 22-4
Refer to Graph 22-4.Which of the following statements is NOT true for a consumer who moves from point B to point A?

A)the consumer is equally well-off
B)the consumer is willing to sacrifice croissants to obtain coffee
C)the marginal rate of substitution at points A and B differ
D)the consumer is better off since point A is higher than point B

Question 63

A consumer:

A)prefers higher indifference curves to lower indifference curves
B)is equally satisfied with any indifference curve
C)is generally unable to place all consumption bundles on an indifference curve
D)prefers indifference curves with positive slopes

Question 64

NARRBEGIN: 22-3
Graph 22-3
Refer to Graph 22-3.Suppose that these budget lines exist for the same consumer who faced the same budget constraint in both panels.What can we infer about the prices of the two goods?

A)the price of Y in panel a is higher than the price of Y in panel b
B)the prices of both X and Y are lower in panel a
C)the price of X in panel a is higher than the price of X in panel b
D)none of the above are true

Question 65

Suppose at the current consumption bundle, the marginal rate of substitution of pizza for pepsi is 4 litres of pepsi for every one pizza.If we took four litres of pepsi away from our consumer and gave them one extra pizza, which of the following statements would be correct?

A)the consumer would be on a higher indifference curve
B)the consumer would be on a lower indifference curve
C)the consumer's marginal rate of substitution of pepsi for pizza would rise
D)the consumer's marginal rate of substitution of pepsi for pizza would fall

Question 66

The rate at which a consumer is willing to exchange one good for another, and maintain a constant level of satisfaction, is called the:

A)marginal rate of substitution
B)relative price ratio
C)relative expenditure ratio
D)value of marginal product

Question 67

NARRBEGIN: 22-3
Graph 22-3
Refer to Graph 22-3.Using the figure in panel (b), what is ratio of the Price of Y to the price of X (i.e.PX/PY)?

A)4/1
B)1/1
C)1/4
D)1/16

Question 68

Indifference curves provide a way to graphically represent:

A)the constraints faced by individuals
B)an individual's preferences
C)the relative price of commodities
D)an income level sufficient to make an individual happy

Question 69

NARRBEGIN: 22-3
Graph 22-3
Refer to Graph 22-3.If the budget constraint is $160 then from the panel (b) we can determine that the:

A)price of X is $40 and the price of Y is $10
B)price of Y is $40 and the price of X is $10
C)price of X is $4 and the price of Y is $16
D)price of Y is $4 and the price of X is $16

Question 70

If the consumption of one good is increased, how must a consumer alter his consumption of another good in order to remain indifferent between two bundles?

A)he must reduce his consumption of another good
B)he must increase his consumption of another good
C)he must not change his consumption of another good
D)he can reduce, increase or not change his consumption of another good

Question 71

NARRBEGIN: 22-4
Graph 22-4
Refer to Graph 22-4.Which of the following statements is true for a consumer who moves from point C to point D?

A)the consumer is indifferent between point C and point D
B)the consumer is likely to place a higher relative value on croissants at point C than at point D
C)it is difficult to compare the level of consumer satisfaction between points D and C
D)the consumer is definitely worse off

Question 72

The amount of a good that an individual has:

A)is only affected by prices
B)affects the rate at which she is willing to trade
C)is only affected by income
D)will not affect the marginal rate of substitution

Question 73

A consumer's set of indifference curves provides a:

A)complete ranking of all possible consumption bundles
B)ranking of the set of bundles that happen to fall on indifference curves
C)framework for evaluating market equilibriums
D)relative ranking of bundles that provide more of all goods

Question 74

NARRBEGIN: 22-3
Graph 22-3
The indifference curves of perfect compliments are:

A)straight lines
B)at right angles
C)bowed inwards
D)bowed outwards

Question 75

NARRBEGIN: 22-4
Graph 22-4
Refer to Graph 22-4.Which of the following statements is true?

A)since point E and point B have basically equal units of coffee and croissants a consumer would be indifferent between these two points
B)if a consumer moves from point C to point A, her loss of croissants cannot be compensated for by an increase of coffee
C)point E is preferred to all other points identified in the figure
D)since more is preferred to less, point C may be preferred to point E in some circumstances

Question 76

The marginal rate of substitution is:

A)the slope of a budget constraint
B)always constant
C)the slope of an indifference curve
D)the point at which the budget constraint and the indifference curve is tangent

Question 77

If an indifference curve is bowed in toward the origin, the marginal rate of substitution is:

A)different for each bundle along the indifference curve
B)likely to be constant for all bundles along the indifference curve
C)likely to be identical to the price ratio for each bundle along the indifference curve
D)not likely to reflect relative value of goods

Question 78

NARRBEGIN: 22-3
Graph 22-3
Refer to Graph 22-3.Using the figure in panel (a), what is ratio of the price of X to the price of Y (i.e.PX/PY)?

A)50/1
B)5/1
C)1/5
D)1/50

Question 79

NARRBEGIN: 22-4
Graph 22-4
Refer to Graph 22-4.A person who chooses to consume bundle C rather than bundle A is likely to:

A)place a higher relative value on croissants than on coffee
B)place a higher relative value on coffee than on croissants
C)gain more satisfaction from bundle C than bundle A
D)gain more satisfaction from bundle B than bundle A

Question 80

As long as a consumer is on the same indifference curve:

A)her preferences will not affect the marginal rate of substitution
B)she is unable to decide which bundle of goods to choose
C)she is indifferent among the points on that indifference curve
D)she is indifferent to all points which lie on any other indifference curves