Question 1

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

Accepted Answer

A) True 
 B)False

Question 2

Jonathan is planning ahead for retirement and must decide how much to spend and how much to save while he's working in order to have money to spend when he retires. When the substitution effect dominates the income effect, an increase in the interest rate on his savings is likely to:

Accepted Answer

A)  decrease his saving 
B)  increase his saving 
C)  have no effect on his saving 
D)  all of the above are possible

Question 3

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.

Accepted Answer

A) True 
 B)False

Question 4

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)?

Accepted Answer

A)  4/1 
B)  1/1 
C)  1/4 
D)  1/16

Question 5

A good is defined as an inferior good when:

Accepted Answer

A)  the average consumer does not generally choose to consume this good 
B)  an increase in income decreases consumption of the good 
C)  an increase in income increases consumption of the good 
D)  the good is not equally valued by all consumers

Question 6

A consumer's set of indifference curves provides a:

Accepted Answer

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 7

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

Accepted Answer

A) True 
 B)False

Question 8

Graph 22-7
 
-Refer to Graph 22-7. Assume that the consumer depicted in the graph faces prices and income such that she optimises at pointA. According to the graph, what change allows the consumer to move to point B?

Accepted Answer

A)  a decrease in the price of M&Ms 
B)  an increase in the price of M&Ms 
C)  an increase in the price of Skittles 
D)  a decrease in the price of Skittles

Question 9

If an in-kind transfer forces the recipient to consume more of the good than he would choose with a cash transfer of equal value, then:

Accepted Answer

A)  the recipient would prefer the in-kind transfer over a cash transfer of equal dollar value 
B)  the recipient is indifferent between a cash transfer and an in-kind transfer 
C)  the recipient would prefer a cash transfer of equal dollar value 
D)  all of the above are possible

Question 10

Using indifference curves and budget constraints, graphically illustrate the substitution and income effect that would result from a change in the price of one good.

Accepted Answer

The answer of Using indifference curves and budget constraints, graphically...

Question 11

Amy is a professional photographer who specialises in portrait photography. Amy is typically awake for 112 hours each week (she sleeps an average of 8 hours each day). For each hour Amy spends photographing, she can earn $200.
-Refer to the information provided. What is the implicit price that Amy pays for the satisfaction derived from playing an hour of tennis?

Accepted Answer

A)  0 
B)  $75 
C)  $200 
D)  There is not sufficient information to answer this question

Question 12

List and briefly explain each of the four properties of indifference curves.List and briefly explain each of the four properties of indifference curves.

Accepted Answer

The answer of List and briefly explain each of the...

Question 13

When the price of a good increases, ceteris paribus, consumers perceive:

Accepted Answer

A)  an increase in wellbeing if the price increase occurs for an inferior good 
B)  an increase in income if the price increase occurs for a normal good 
C)  a loss in wellbeing since they can no longer purchase the same bundle that they had previously 
D)  a net gain in income if they increase consumption of some goods

Question 14

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.

Accepted Answer

A) True 
 B)False

Question 15

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

Accepted Answer

A) True 
 B)False

Question 16

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

Accepted Answer

A) True 
 B)False

Question 17

Suppose Amy normally buys sushi and miso. There is an increase in the price of miso. If Amy stays on the same indifference curve there has been:

Accepted Answer

A)  an income effect that means she consumes more miso 
B)  an income effect that means she consumes less miso 
C)  a substitution effect that means she consumes more sushi 
D)  a substitution effect that means she consumes less sushi

Question 18

Graph 22-5
 
-Refer to Graph 22-5. Which of the graphs shown represent(s) indifference curves for perfect complements?

Accepted Answer

A)  panel a 
B)  panel b 
C)  panel c 
D)  all of the above

Question 19

The law of demand may be violated:

Accepted Answer

A)  often in the case of many food products 
B)  only when goods are Giffen goods 
C)  typically when the good has a high price elasticity 
D)  in all of the above cases

Question 20

Graph 22-4
 
-Refer to Graph 22-4. Which of the following statements is true?

Accepted Answer

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

Exam 22: The Theory of Consumer Choice

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

Jonathan is planning ahead for retirement and must decide how much to spend and how much to save while he's working in order to have money to spend when he retires. When the substitution effect dominates the income effect, an increase in the interest rate on his savings is likely to:

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.

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 good is defined as an inferior good when:

A consumer's set of indifference curves provides a:

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

Graph 22-7 -Refer to Graph 22-7. Assume that the consumer depicted in the graph faces prices and income such that she optimises at pointA. According to the graph, what change allows the consumer to move to point B?

If an in-kind transfer forces the recipient to consume more of the good than he would choose with a cash transfer of equal value, then:

Using indifference curves and budget constraints, graphically illustrate the substitution and income effect that would result from a change in the price of one good.

List and briefly explain each of the four properties of indifference curves.List and briefly explain each of the four properties of indifference curves.

When the price of a good increases, ceteris paribus, consumers perceive:

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.

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

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

Suppose Amy normally buys sushi and miso. There is an increase in the price of miso. If Amy stays on the same indifference curve there has been:

Graph 22-5 -Refer to Graph 22-5. Which of the graphs shown represent(s) indifference curves for perfect complements?

The law of demand may be violated:

Graph 22-4 -Refer to Graph 22-4. Which of the following statements is true?