Question 1

Draw a graph with Goods Per Day on the vertical axis and Leisure Hours Per Day increasing from left to right on the horizontal axis. Show that a person who works can work fewer hours and increase utility when the wage rate increases.

Accepted Answer

The answer of Draw a graph with Goods Per Day...

Question 2

An individual derives utility from games, g (y-axis), and toy airplanes, a (x-axis), described by the utility function U(g,a)= g0.6a0.4. The price per game is $20 and the price of toy airplanes is $10. Using the slope of the income consumption curve (ICC), determine whether games and toy airplanes are normal or inferior goods when income increases from $100 to $200.

Accepted Answer

A) Both goods are normal goods with an ICC slope of  . 
B) Both goods are normal goods with an ICC slope of  . 
C) Both goods are inferior goods with an ICC slope of -  . 
D) Both goods are inferior goods with an ICC slope of -  .

Question 3

Suppose a graph is drawn to show a consumer's preferences for football tickets and basketball tickets. The quantity of football tickets is measured on the horizontal axis. If the price-consumption curve is horizontal when the price of football tickets changes, then

Accepted Answer

A) football tickets are an inferior good. 
B) the demand for football tickets is perfectly elastic. 
C) the demand for football tickets is unit elastic. 
D) the demand curve for football tickets will be horizontal.

Question 4

Suppose a person's utility for leisure (L)and consumption (Y)can be expressed as U = Y ∗ L and this person has no non-labor income. Assuming a wage rate of $10 per hour, show what happens to the person's labor supply when the person wins a lottery prize of $100 per day.

Accepted Answer

The answer of Suppose a person's utility for leisure (L)and...

Question 5

Under which of the following conditions will there be no substitution bias in the CPI?

Accepted Answer

A) Indifference curves are convex. 
B) Indifference curves are L-shaped. 
C) Indifference curves are linear. 
D) Indifference curves are downward sloping.

Question 6

For an inferior good, if the income effect more than offsets the substitution effect, we call that good

Accepted Answer

A) a Giffen good. 
B) a normal good. 
C) an inferior good. 
D) a neutral good.

Question 7

Richard receives government transfer payments and currently consumes 5 guns and 6 goose livers. Assume the price of guns decreases by 10% and the price of goose liver increases by 20%. The government raises Richard's transfer payments so he can still afford 5 guns and 6 goose livers. Does this constitute a true cost-of-living adjustment (COLA)?

Accepted Answer

A) No. Richard is overcompensated. 
B) No. Richard is undercompensated. 
C) Yes. The payment just achieves the right level of compensation. 
D) Not enough information.

Question 8

When the price of a good changes, the substitution effect can be found by comparing the equilibrium quantities purchased

Accepted Answer

A) on the old budget line and the new budget line. 
B) on the original indifference curve when faced with the original prices and when faced with the new prices. 
C) on the new budget line and a hypothetical budget line that is a shift back to the original indifference curve parallel to the new budget line. 
D) on the new indifference curve.

Question 9

The amount of money one would have to take from a consumer to harm her by as much as the price increase is called

Accepted Answer

A) compensating variation. 
B) structured settlement. 
C) equivalent variation. 
D) consumer surplus.

Question 10

Which graph in the above figure best represents a good that is an inferior good at some income levels, and a normal good at other income levels?

Accepted Answer

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

Question 11

A demand curve for a Giffen good would be

Accepted Answer

A) upward sloping. 
B) downward sloping. 
C) horizontal. 
D) vertical.

Question 12

A backward-bending labor supply curve implies that

Accepted Answer

A) the substitution effect dominates the income effect at higher wage rates but not at lower wage rates. 
B) the substitution effect dominates the income effect at lower wage rates but not at higher wage rates. 
C) leisure is an inferior good. 
D) workers are irrational.

Question 13

-The above figure shows Bobby's indifference map for soda and juice. B1 indicates his original budget line. B2 indicates his budget line resulting from a decrease in the price of soda. What change in quantity best represents his substitution effect?

Accepted Answer

A) 3 
B) 10 
C) 15 
D) 7

Question 14

Which of the following is the geometric mean of 4 and 9?

Accepted Answer

A) 6.5 
B) 6 
C) 36 
D) 3.6

Question 15

Median household income is $50,000 per year. The typical household spends about $125 per year on milk, which has an income elasticity of about 0.07. From this information, we can conclude that

Accepted Answer

A) milk is a luxury. 
B) milk is a Giffen good. 
C) the income effect from a change in the price of milk is very large. 
D) the income effect from a change in the price of milk is very small.

Question 16

In the case of a normal good,

Accepted Answer

A) demand curves always slope downward. 
B) the income effect and substitution effect are in the same direction. 
C) the Engel curve slopes upward. 
D) All of the above.

Question 17

-When John's income was low, he could not afford to dine out and would respond to a pay raise by purchasing more frozen dinners. Now that his income is high, a pay raise causes him to dine out more often and buy fewer frozen dinners. Which graph in the above figure best represents John's Engel curve for dining out?

Accepted Answer

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

Question 18

What is the benefit of understanding the income and the substitution effects?

Accepted Answer

A) The income effect might run in the opposite direction of the substitution effect. 
B) The income effect always runs in the opposite direction of the substitution effect. 
C) The income and substitution effects just offset each other, which explains a lot. 
D) The income and substitution effects are proportional to each other.

Question 19

When the price of a good changes, the income effect can be found by comparing the equilibrium quantities purchased

Accepted Answer

A) on the old budget line and the new budget line. 
B) on the original indifference curve when faced with the original prices and when faced with the new prices. 
C) on the new budget line and a hypothetical budget line that is a shift back to the original indifference curve parallel to the new budget line. 
D) on the new indifference curve.

Question 20

What is one way to adjust the CPI for substitution bias?

Accepted Answer

A) Use the Paasche index. 
B) Use the Laspeyres index. 
C) Multiply the Paasche Index and the Laspeyres index. 
D) Take the geometric mean of the Paasche index and the Laspeyres index.

Exam 5: Applying Consumer Theory

Draw a graph with Goods Per Day on the vertical axis and Leisure Hours Per Day increasing from left to right on the horizontal axis. Show that a person who works can work fewer hours and increase utility when the wage rate increases.

Suppose a graph is drawn to show a consumer's preferences for football tickets and basketball tickets. The quantity of football tickets is measured on the horizontal axis. If the price-consumption curve is horizontal when the price of football tickets changes, then

Suppose a person's utility for leisure (L)and consumption (Y)can be expressed as U = Y ∗ L and this person has no non-labor income. Assuming a wage rate of $10 per hour, show what happens to the person's labor supply when the person wins a lottery prize of $100 per day.

Under which of the following conditions will there be no substitution bias in the CPI?

For an inferior good, if the income effect more than offsets the substitution effect, we call that good

When the price of a good changes, the substitution effect can be found by comparing the equilibrium quantities purchased

The amount of money one would have to take from a consumer to harm her by as much as the price increase is called

Which graph in the above figure best represents a good that is an inferior good at some income levels, and a normal good at other income levels?

A demand curve for a Giffen good would be

A backward-bending labor supply curve implies that

-The above figure shows Bobby's indifference map for soda and juice. B₁ indicates his original budget line. B₂ indicates his budget line resulting from a decrease in the price of soda. What change in quantity best represents his substitution effect?

Which of the following is the geometric mean of 4 and 9?

Median household income is $50,000 per year. The typical household spends about $125 per year on milk, which has an income elasticity of about 0.07. From this information, we can conclude that

In the case of a normal good,

What is the benefit of understanding the income and the substitution effects?

When the price of a good changes, the income effect can be found by comparing the equilibrium quantities purchased

What is one way to adjust the CPI for substitution bias?