Deck 22: The Theory of Consumer Choice

Question 1

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

Answer 1

True

Question 2

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.

Answer 2

False

Question 3

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

Answer 3

False

Question 4

Because a consumer prefers more consumption to less, higher indifference curves are preferred to lower ones.

Question 5

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 6

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

Question 7

A consumer is equally happy at all points on any given indifference curve.

Question 8

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

Question 9

Indifference curves are downward-sloping and linear.

Question 10

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

Question 11

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

Question 12

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

Question 13

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.

Question 14

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

Question 15

The reason people consume less than they desire to is because their spending is constrained by their values.

Question 16

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

Question 17

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 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

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

Question 20

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

Question 21

The income and substitution effects work in opposite directions.

Question 22

An indifference curve can be thought of as an equal-utility curve.

Question 23

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 24

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

Question 25

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 26

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 27

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 28

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

Question 29

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

Question 30

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

Question 31

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

Question 32

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

Question 33

Substitution effects always dominate income effects.

Question 34

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

Question 35

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 36

Giffen goods are very shared.

Question 37

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 38

When interest rates rise, the substitution effect induces savers to save more, whereas the income effect induces savers to save less.

Question 39

Giffen goods are goods for which an increase in the price affects quantity demanded.

Question 40

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

Question 41

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 42

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 43

Which of the following statements is true? (i) consumers cannot consume at points outside their budget constraint
(ii) optimising consumers spend half of their income on each of two goods
(iii) consumers can consume at points inside their budget constraint

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

Question 44

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 45

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 46

When the price of a good rises:

A) demand falls
B) quantity demanded falls
C) quantity supplied falls
D) quantity demanded rises

Question 47

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 48

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 49

Amy buys sushi and miso for lunch. Her weekly budget for lunch is $24. If the price of sushi is $0.50 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) 36 sushi pieces and 15 cups of miso
C) 24 sushi pieces and 10 cups of miso
D) 10 sushi pieces and 24 cups of miso

Question 50

The slope of the budget constraint is determined by the:

A) relative price of commodities represented on the axis
B) level of income of the consumer
C) preferences of a consumer
D) endowment of productive resources

Question 51

The theory of consumer choice examines:

A) the determination of output in competitive markets
B) the trade-offs inherent in decisions made by consumers
C) how consumers select inputs into manufacturing production processes
D) the determination of prices in competitive markets

Question 52

Graph 22-3

Refer to Graph 22-3. Using the figure in panel (a), if income is equal to $120, the price of good Y is:

A) $1.20
B) $2.40
C) $12.00
D) $24.00

Question 53

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 54

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 55

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 56

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 57

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 58

If an in-kind transfer of a good does not force the recipient to consume more of the good than he would on his own, then cash and in-kind transfers have exactly the same effect on the consumption and welfare of the recipient.

Question 59

The theory of consumer choice describes how people make decisions.

Question 60

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 61

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 62

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 63

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 64

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 65

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 66

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 67

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 68

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 69

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 70

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 71

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 72

Refer to Graph 22-3. If the budget constraint is $120 then from the panel (b) we can determine that the:

A) price of X is $30 and the price of Y is $7.50
B) price of Y is $30 and the price of X is $7.50
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 73

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

Question 74

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 75

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 76

The slope of an indifference curve is equal to:

A) - 1
B) positive, since indifference curves slope upward
C) the marginal rate of substitution
D) the same as the slope of the budget constraint at every point

Question 77

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 78

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 79

Consumer preferences are typically represented by:

A) budget constraints
B) cost curves
C) supply curves
D) indifference curves

Question 80

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