Question 1

Employing a fixed-weight index like the Consumer Price Index to adjust a person's salary in response to inflation will overcompensate this person because doing so will allow this person to

Accepted Answer

A)  buy the same bundle of goods as he did before the inflation. 
B)  achieve a higher level of utility than he did before the inflation. 
C)  achieve the same level of utility as before the inflation. 
D)  buy more of all goods.

Question 2

A tax cut will unambiguously lower income-tax revenue.

Accepted Answer

A) True 
 B)False

Question 3

-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 4

-The above figure shows Larry's indifference map and budget lines for ham and pork.Which of the following statements is TRUE?

Accepted Answer

A)  Larry's Engel curve for pork will be upward sloping. 
B)  Larry's Engel curve for pork will be downward sloping. 
C)  Larry's Engel curve for pork will be backward bending. 
D)  Larry's Engel curve for pork cannot be derived from the information provided.

Question 5

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 6

Before an uneven rise in prices Allan consumed 5 bread and 6 juice.After the price increase and with an increased welfare payment from the government Allan consumes 4 bread and 7 juice.Does the government payment represent a true cost-of-living adjustment (COLA)?

Accepted Answer

A)  Yes, if the two consumption bundles lie on the same indifference curve. 
B)  Yes, if the second bundle yields more utility than the first. 
C)  No, the first bundle is clearly preferred. 
D)  Not enough information.

Question 7

A movement upward along an upward sloping Engel curve corresponds to

Accepted Answer

A)  upward sloping indifference curves. 
B)  crossing indifference curves. 
C)  a rotation in the budget constraint. 
D)  a parallel shift in the budget constraint.

Question 8

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 9

Suppose the quantity of x is measured on the horizontal axis.If the price consumption curve is vertical when the price of x changes,then the demand for x is

Accepted Answer

A)  perfectly elastic. 
B)  perfectly inelastic. 
C)  unit elastic. 
D)  There is not enough information to determine the price elasticity of demand for x.

Question 10

-The above figure shows a consumer's indifference curves for soda and all other goods.Assuming a budget of $100,derive the consumer's demand for soda for prices of $4 and $10 per case of soda.Estimate the price elasticity of demand for soda.

Accepted Answer

The answer of 
-The above figure shows a consumer's indifference...

Question 11

If Bobby thinks that leisure is an inferior good,then his labor supply curve

Accepted Answer

A)  is backward bending. 
B)  is always negatively sloped. 
C)  is always positively sloped. 
D)  does not exist.

Question 12

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 13

A Giffen good has

Accepted Answer

A)  a positive substitution effect. 
B)  a negative income effect. 
C)  a larger income effect than substitution effect. 
D)  All of the above.

Question 14

-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 15

The substitution effect can be measured holding ________ constant.

Accepted Answer

A)  income 
B)  utility 
C)  the price of one good 
D)  the price of all goods

Question 16

Using a Paasche index to calculate the Consumer Price Index (CPI)

Accepted Answer

A)  weights quantities with current prices. 
B)  weights prices with base-year quantities. 
C)  weights quantities with base-year prices. 
D)  weights prices with current year quantities.

Question 17

An inferior good exhibits

Accepted Answer

A)  a negative income elasticity. 
B)  a downward sloping Engel curve. 
C)  a decline in the quantity demanded as income rises. 
D)  All of the above.

Question 18

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 19

A demand curve for a Giffen good would be

Accepted Answer

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

Question 20

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 -  .

Exam 5: Applying Consumer Theory