Deck 5: Applications of Rational Choice and Demand Theories

Question 1

If I get 10 units of pleasure from my first ice cream cone and 2 less units than before from each succeeding cone, I will buy ____ cones and gain _____ units of consumer surplus if the price of a cone = to 5 units of pleasure.

A)4, 28
B)6, 30
C)2, 18
D)3, 9

Answer 1

D

Question 2

Suppose you receive Y1 of your income this period and Y2 of your income next period.If you can either borrow or lend at an interest rate r, what is the most you can consume in the current period?

A)Y1(1 + r) + Y2
B)Y2(1 + r) + Y1
C)Y1/(1 + r) + Y2
D)Y2/(1 + r) + Y1

Answer 2

D

Question 3

When people choose to wait for a kiss that they have won from a favorite movie star, they are clearly

A)Exhibiting a negative time preference
B)Exhibiting a positive time preference
C)Exhibiting a zero time preference
D)Illustrating that the anticipatory pleasure of the kiss exceeds the value lost by waiting for it

Answer 3

D

Question 4

If you buy food which then is put on special at half price just after you paid,

A)You will be disappointed and be worse off
B)You will be better off because you will go back to get some more food at bargain prices
C)Your welfare will not change since you just finished your shopping
D)Logic can not lead to an answer to this question even if you have a typical preference pattern

Question 5

If an educational voucher system were adopted where parents could spend their share of education tax dollars at any school of their choice, then we could expect families to

A)Choose less education than before because the public schools would get better
B)Choose more education because they do not need to pay double for private education
C)Make no changes in their education choices because the relative price of private and public education has not changed
D)Make choices that can not be predicted by economic theory

Question 6

If you wear your favorite clothes first and eat your favorite food before the food you prefer less you most likely have a

A)Positive time preference
B)A negative time preference
C)A neutral time preference
D)Time preference that varies depending on whether you are eating or dressing

Question 7

Suppose a bank will pay you a 10% interest rate on your deposits for 1 period.In this case you must sacrifice $10 of current consumption to finance

A)$9 of future consumption
B)$10 of future consumption
C)$11 of future consumption
D)$1 of future consumption

Question 8

If the marginal rate of substitution between future and current consumption is less than one, then this consumer exhibits

A)A positive time preference
B)A negative time preference
C)A neutral time preference
D)An increasing preference

Question 9

Suppose you receive Y1 of your income this period and Y2 of your income in the next period.If you can either borrow or lend at an interest rate r, what is the most you can consume in the future period?

A)Y1(1 + r) + Y2
B)Y2(1 + r) + Y1
C)Y1/(1 + r) + Y2
D)Y2/(1 + r) + Y1

Question 10

If $100 today is worth $150 to you in the future, then you exhibit

A)A positive time preference
B)A negative time preference
C)A neutral time preference
D)A negative marginal rate of substitution

Question 11

Differences in time preferences depend on

A)Uncertainty regarding the future
B)Social preference
C)Differences in the relative size of expected future incomes
D)The time

Question 12

The horizontal intercept of the intertemporal budget constraint is referred to as

A)The present value of lifetime income
B)The current value of future income
C)The future value of lifetime income
D)The future value of present income

Question 13

If the government wanted to curb consumption of alcohol by taxing alcohol without hurting consumer's welfare it would

A)Raise the tax on alcohol until demand for alcohol became elastic
B)Need to know the substitution effect but not the income effect of a tax hike
C)Need to know the income effect but not the substitution effect of a tax hike
D)Tax until the income effect of the price increase, which would be refunded, is exactly equal to the revenue gained from the tax

Question 14

If the opportunity cost of a unit of current consumption is exactly 1 unit of future consumption then you must sacrifice $10 of current consumption to finance

A)$9 of future consumption
B)$10 of future consumption
C)$11 of future consumption
D)$1 of future consumption

Question 15

The Permanent Income and Life-Cycle Hypotheses imply that

A)Consumers generally favor current consumption over future consumption
B)The primary determinant of current consumption is permanent income
C)The primary determinant of permanent income is current consumption
D)Consumers are more likely to save if they are uncertain about the future

Question 16

A decrease in the interest rate will

A)Produce an increase in current savings
B)Produce an increase in current consumption
C)Produce a decrease in current savings
D)Depend on the particular consumer's preferences

Question 17

The consumer price index overestimates inflation because it

A)Compares prices of what consumers actually buy rather than a fixed basket of goods
B)Allows consumers to move along a given indifference curve from one year to the next
C)Measures the cost of a market basket in the second year that has too many units of the most inflated items
D)Uses the second year's market basket as the base rather than the first year's basket

Question 18

If markets for addictive drugs have a more elastic demand curve than is often thought, and if addicts tend to be unstable people with low incomes, we might speculate that the most likely reason for the surprising elasticity estimates is that

A)The substitution effect is smaller than expected because addicts aren't as addicted as we
B)thought
C)The income effect has a more constraining effect than we had anticipated
D)Addictive drugs are inferior goods
E)The income and substitution effects work in opposite directions

Question 19

In general, despite some examples to the contrary, people

A)Have a positive time preference
B)Have a negative time preference
C)Value the present and the future about the same
D)Have a negative time preference for food and basic necessities and a positive time preference for services and luxuries

Question 20

The local golf course has upgraded seven of its 18 holes and raised its rates from 20 to 24 dollars.It would be correct to say that

A)The true inflation rate for golf is more than 20%
B)The true inflation rate for golf is 20%
C)The true inflation rate for golf is less than 20%
D)More information is needed to answer this question

Question 21

In analyzing the gasoline tax and subsidy policy discussed in the text, the final solution illustrates that

A)Consumers are worse off then they were before the policy began
B)Consumers do not cut back on fuel consumption
C)The government is made better off financially
D)Social welfare increases

Question 22

If you had a windfall of $5,000 in the present time period and you save some of it, your saving behavior would likely be due to the fact that

A)Your marginal utility of present income falls as your income goes up
B)The extra income changes the slope of your time preference indifference curves making then steeper
C)Your indifference curves for present and future income are vertical
D)Your indifference curves for present and future are horizontal

Question 23

Show, using a sketch graph, why a consumer prefers a cash gift rather than a larger gift of merchandise.

Question 24

According to the analysis in your textbook, the school voucher program would

A)increase the level of spending on education
B)decrease the level of spending on education
C)leave the level of spending on education the same
D)force some people to leave the public school system

Question 25

Suppose an individual demand curve is given by P = 100 - 5Q, where P is the price of cigarettes ($/pack) and Q is the quantity she consumes (packs/week).Assuming her income per week is $1,000 and the current price of cigarettes is $5 per pack, by how much will her consumer surplus decline if the price of cigarettes increased to $10/pack?

A)$92.5
B)$810
C)$950
D)$25

Question 26

If the interest rate increases to 4 percent will cause you to

A)Save more of your income
B)Save less of your income
C)Be more time patient
D)Be more time impatient

Question 27

In a diagram, consumer surplus is always represented by the area:

A)between the demand curve and the supply curve
B)between the demand curve and the price
C)below the demand curve
D)above the demand curve

Question 28

If the demand function for apples is P = 1 - Q, how much consumer surplus does the consumer gain when the price of the apples equals 5?

A)25
B)5
C)20
D)12.5

Question 29

One thousand dollars given to you a year from now is worth __________ to you today if the relevant discount rate is 10%.

A)$1000
B)$1100
C)$909
D)$900

Question 30

What is the maximum amount you could consume in the future?

A)65,400
B)69,000
C)20,400
D)65,000

Question 31

Say an individual demand curve was given by P = 50 - 5Q. When the price is $25, consumer surplus is around:

A)$63
B)$188
C)$125
D)$100

Question 32

Colin's demand for golf at his local club each season is P = 50 - 2Q.If the golf course charges $26 dollars per round of golf, how much could it charge Colin in a membership fee before he would not play there?

A)$1,250
B)$144
C)$288
D)$312

Question 33

When you allocate consumption optimally between the two periods the marginal rate of time preference between the two periods is:

A)-1.02
B)-1.00
C)-1.80
D)0.80

Question 34

According to the analysis in your text, the school voucher program would

A)Increase the quality of education
B)Decrease the quality of education
C)Not affect education quality, but would make lower income families better off
D)Increase the quality of education, but not improve the welfare of low income families

Question 35

According to the Life-cycle hypothesis if a person received a payment roughly equals to her current income her consumption would:

A)roughly double.
B)increase, but not by as much as the increase in income
C)increase by more than the increase in income
D)would not increase at all.

Question 36

Say the bus authority in your city increased the typical bus fare from $1.00 to $1.50, and that due to this increase total revenue increased by 20%. Based on this we know that the price elasticity of bus rides in your neighborhood is (assume demand curve is linear):

A)0.4
B)0.8
C)1
D)1.5

Question 37

Use the following to answer the next two questions.

Question 38

When a product depicted on the horizontal axis of a typical indifference curve model of behavior is taxed

A)The budget line becomes steeper
B)The budget line becomes flatter
C)The indifference curve of the consumer shifts right
D)All the indifference curves of the consumer become steeper

Question 39

If the demand function for city bus rides is P = 100 - 10Q and the present price of a ride is 50, then

A)Raising prices will increase city revenue
B)Raising prices will decrease city revenue
C)Raising prices will not change city revenue
D)From the information given it is not clear what would happen to city revenue if price is increased

Question 40

Suppose your university decides to increase parking fees in order to deal with the shortage of parking spaces.Nevertheless, the president of your student body convinces the university to pay back the amount spent on higher parking fees to students in the form of a rebate at the end of the school year.Therefore, the increase in parking fees will:

A)NOT solve the parking shortage
B)Reduce demand for parking and hence alleviate the parking shortage
C)Will have no effect since it will be offset entirely by the rebate
D)Make the parking shortage even worse

Question 41

Describe in words why the consumer price index overestimates inflation.

Question 42

Show, using a similar sketch graph, why another consumer chooses the merchandise rather than the cash grant.

Question 43

Show with a sketch graph on each graph what the market does to correct the disequilibrium.

Question 44

Why is the market for loanable funds not in equilibrium?

Question 45

What will happen in the market to bring about equilibrium?

Question 46

From the information provided below, calculate the Laspeyres and Paasche price indexes.