Question 1

Higher education is a normal good. If its price falls

Accepted Answer

A)  the quantity demanded of higher education will fall. 
B)  the substitution and income effects work in opposite directions. 
C)  the income effect is negative. 
D)  higher education will satisfy the law of demand.

Question 2

If the price of a good falls and the good is an inferior good, the income effect causes a decrease in the quantity demanded of that good.

Accepted Answer

A) True 
 B)False

Question 3

A change in the relative prices of which of the following pair of goods would likely cause the smallest substitution effect?

Accepted Answer

A)  Right shoes and left shoes. 
B)  Petrol from BP and petrol from Shell. 
C)  Kit-Kat chocolate snacks and Twix chocolate snacks. 
D)  Coke and Pepsi.

Question 4

Indifference curves for perfect substitutes are

Accepted Answer

A)  right angles. 
B)  bowed outward. 
C)  straight lines. 
D)  non-existent. 
E)  bowed inward.

Question 5

Exhibit A

-Refer to Exhibit A. Suppose that the consumer must choose between buying socks and belts. Also, suppose that the consumer's income is R1 000. If the price of a belt is R100 and the price of a pair of socks is R50, the consumer will choose to buy the commodity bundle represented by point?

Accepted Answer

A)  Z 
B)  X 
C)  Y 
D)  the optimal point cannot be determined from this graph.

Question 6

Indifference curves tend to be bowed inward because of diminishing

Accepted Answer

A)  marginal rates of substitution. 
B)  demand for the good as prices rise. 
C)  income. 
D)  supply of the good being consumed.

Question 7

Exhibit A

-Refer to Exhibit A. Suppose that the consumer must choose between buying socks and belts. Also, suppose that the consumer's income is R1 000. Suppose that the price of a pair of socks falls from R50 to R20. The substitution effect is represented by the movement from point?

Accepted Answer

A)  Z to point X. 
B)  X to point Y. 
C)  X to point Z. 
D)  Y to point X.

Question 8

Evaluate the following statement, "Warren Buffet is the second richest person in the world. He does not face any constraint on his ability to purchase commodities he wants."

Accepted Answer

The answer of Evaluate the following statement, "Warren Buffet is...

Question 9

The limit on the consumption bundles that a consumer can afford is known as

Accepted Answer

A)  an indifference curve. 
B)  the budget constraint. 
C)  the marginal rate of substitution. 
D)  the consumption limit.

Question 10

Last week, the reserve bank took steps to lower interest rates by one percentage point. This means that

Accepted Answer

A)  the opportunity cost of current consumption has fallen. 
B)  the opportunity cost of future consumption has fallen. 
C)  the cost of borrowing has risen. 
D)  households will save more money to make up for lost interest earnings.

Question 11

An individual's demand curve for a good is derived by

Accepted Answer

A)  varying the income level and observing the resulting total utility derived from both goods. 
B)  varying the price of one good and observing the resulting quantities of the other good. 
C)  shifting the budget line to the left and calculating the loss in total utility. 
D)  varying the price of one good and observing the resulting quantities demanded of that good.

Question 12

A Giffen good is an extremely inferior good.

Accepted Answer

A) True 
 B)False

Question 13

Explain the relationship between the budget constraint and indifference curve at a consumer's optimum.

Accepted Answer

The answer of Explain the relationship between the budget constraint...

Question 14

The marginal rate of substitution between two goods equals the

Accepted Answer

A)  marginal utility of one divided by the marginal utility of the other. 
B)  marginal utility of one times the marginal utility of the other. 
C)  marginal cost of one times the marginal cost of the other. 
D)  price of one good divided by the price of the other.

Question 15

Why do people face trade-offs?

Accepted Answer

The answer of Why do people face trade-offs?...

Question 16

Indifference curves measure the consumer's willingness to trade one good for another good while maintaining a constant level of satisfaction.

Accepted Answer

A) True 
 B)False

Question 17

If the price of hamburgers increases, the substitution effect works to

Accepted Answer

A)  decrease the quantity of hamburgers supplied. 
B)  increase the number of hamburger buns demanded. 
C)  decrease the quantity of hamburgers demanded. 
D)  increase the number of hamburger buns supplied.

Question 18

Bongiwe spends all of her income on warm-up suits and running shoes, and the price of a warm-up suit is four times as large as the price of a pair of shoes. Then, in order to maximise total utility, Bongiwe should

Accepted Answer

A)  buy four times as many warm-up suits as pairs of running shoes. 
B)  buy four times as many pairs of running shoes as warm-up suits. 
C)  divide her income equally between warm-up suits and running shoes. 
D)  buy both items until the marginal satisfaction of a warm-up suit is four times the marginal satisfaction of a pair of running shoes.

Question 19

Suppose a consumer must choose between the consumption of sandwiches and pizza. If we measure the quantity of pizza on the horizontal axis and the quantity of sandwiches on the vertical axis, and if the price of a pizza is R100 and the price of a sandwich is R50, then the slope of the budget constraint is:

Accepted Answer

A)  2 
B)  10 
C)  ½ 
D)  5

Question 20

Stefan consumes only cheese and crackers.
a) Could these both be inferior goods for Stefan? Explain.
b) Suppose that cheese is a normal good for Stefan while crackers is inferior. If the price of cheese falls, explain what happens to Stefan's consumption of both cheese and crackers.

Accepted Answer

The answer of Stefan consumes only cheese and crackers.
a) Could...

Exam 5: Background to Demand: Consumer Choices

Higher education is a normal good. If its price falls

If the price of a good falls and the good is an inferior good, the income effect causes a decrease in the quantity demanded of that good.

A change in the relative prices of which of the following pair of goods would likely cause the smallest substitution effect?

Indifference curves for perfect substitutes are

Exhibit A -Refer to Exhibit A. Suppose that the consumer must choose between buying socks and belts. Also, suppose that the consumer's income is R1 000. If the price of a belt is R100 and the price of a pair of socks is R50, the consumer will choose to buy the commodity bundle represented by point?

Indifference curves tend to be bowed inward because of diminishing

Exhibit A -Refer to Exhibit A. Suppose that the consumer must choose between buying socks and belts. Also, suppose that the consumer's income is R1 000. Suppose that the price of a pair of socks falls from R50 to R20. The substitution effect is represented by the movement from point?

Evaluate the following statement, "Warren Buffet is the second richest person in the world. He does not face any constraint on his ability to purchase commodities he wants."

The limit on the consumption bundles that a consumer can afford is known as

Last week, the reserve bank took steps to lower interest rates by one percentage point. This means that

An individual's demand curve for a good is derived by

A Giffen good is an extremely inferior good.

Explain the relationship between the budget constraint and indifference curve at a consumer's optimum.

The marginal rate of substitution between two goods equals the

Why do people face trade-offs?

Indifference curves measure the consumer's willingness to trade one good for another good while maintaining a constant level of satisfaction.

If the price of hamburgers increases, the substitution effect works to

Bongiwe spends all of her income on warm-up suits and running shoes, and the price of a warm-up suit is four times as large as the price of a pair of shoes. Then, in order to maximise total utility, Bongiwe should

Stefan consumes only cheese and crackers. a) Could these both be inferior goods for Stefan? Explain. b) Suppose that cheese is a normal good for Stefan while crackers is inferior. If the price of cheese falls, explain what happens to Stefan's consumption of both cheese and crackers.