Deck 3: The Behavior of Consumers

Question 1

If the marginal value of beef is $8 per pound,then the consumer is willing to pay at most $8 for an additional pound of beef.

Answer 1

True

Question 2

Marginal value equals relative price at the consumer's optimum,even if the optimum is a corner solution.

Answer 2

False

Question 3

When a consumer spends all of the income,it must be true that they are consuming a basket of goods on their budget line.

Answer 3

True

Question 4

If the consumer's income doubles,then his optimal purchases of all goods will double.

Question 5

If a person is willing to trade one good for another,their new basket after the trade must lie on a lower indifference curve than their original basket.

Question 6

The steeper the indifference curve,the greater the marginal value of a good.

Question 7

The slope of the budget line always equals the consumer's marginal value.

Question 8

A consumer can not consume a basket of goods that lies closer to the origin than their budget line because they can not afford that basket.

Question 9

An indifference curve is a construct used by economists to show how tastes for an individual change.

Question 10

The marginal value of a good is the dollar value that the consumer receives,on average,from each unit of the good purchased.

Question 11

If the consumer chooses not to purchase potatoes,then the marginal value of potatoes must be less than or equal to the relative price of potatoes.

Question 12

If the consumer's income and all prices simultaneously triple,then his optimum will not change.

Question 13

A doubling of all prices has the same effect on the budget line as reducing income by half.

Question 14

If the indifference curve is not tangent to the budget line,then we can be sure that the consumer is not at the optimum.

Question 15

When using the composite good convention all other goods are measured in terms of dollars.

Question 16

The budget line is steep when X in inexpensive relative to Y.

Question 17

There are an infinite number of choices faced by a consumer that are shown along an indifference curve.

Question 18

The budget line illustrates the consumer's opportunities and the indifference curve illustrates the consumer's preference.

Question 19

Indifference curves fill the fourth quadrant of the plane.

Question 20

Along a convex indifference curve,the marginal value of a good rises as the quantity of the good rises.

Question 21

If the consumer has the same tax bill under a head tax as under an income tax,then less leisure will be consumed under the head tax than under the income tax.

Question 22

d. dependent upon the prices of the two goods

Question 23

When Homer has 5 doughnuts,his marginal value is 15¢ per doughnut.We can conclude that Homer

A) places a value of 3¢ on each doughnut he owns.
B) needs to purchase more than 5 doughnuts to reach his optimum.
C) receives 75¢ worth of total satisfaction from his 5 doughnuts.
D) would refuse to pay more than 15¢ for a sixth doughnut.

Question 24

A utility maximizing person gets marginal utility from consuming their last pencil and pen of 4 and 10 respectively.If pencils cost 10 cents a piece,the pens must cost 25 cents a piece.

Question 25

Under standard assumptions,which of the following is not a property of indifference curves?

A) They are downward sloping and convex.
B) They fill the plane and never cross.
C) Their slope is equal,in magnitude,to the relative price of the goods.
D) Baskets on indifference curves further away from the origin provide more satisfaction than those which are closer to the origin.

Question 26

A Laspeyres price index is based on the basket consumed in the later period..

Question 27

Market basket B is to the northwest of basket A but lies on the same indifference curve for a consumer.Market basket C also lies to the northwest of A but is above the indifference curve.This consumer

A) prefers C to A.
B) is also indifferent between A and C.
C) prefers B to A.
D) prefers C to B.

Question 28

A Paasche price index makes price changes seem better for the consumer than they really are.

Question 29

Goods X and Y

For the following questions, assume that good X is on the horizontal axis and good Y is on the vertical axis in the consumer-choice diagram. PX denotes the price of good X, PY is the price of good Y, and I is the consumer's income. Unless otherwise stated, the consumer's preferences are assumed to satisfy the standard assumptions.


-Refer to Goods X and Y.The relative price of good X in terms of good Y is always equal to

A) the magnitude of the slope of the budget line.
B) the marginal value of X in terms of Y.
C) the horizontal intercept of the budget line.
D) the vertical intercept of the budget line.

Question 30

A budget line is constructed to show

A) how consumers who budget their expenditures achieve more satisfaction than those who do not.
B) the set of all baskets that the consumer can afford,given prices and his or her income.
C) the set of all baskets that the consumer would be willing to purchase given various prices for the goods in the basket.
D) the set of all baskets that the consumer considers equally desirable.

Question 31

Facing choices between beer and pizza,the number of pizzas a consumer would be willing to trade for just one beer is called

A) the marginal value of beer in terms of pizza.
B) the marginal value of pizza in terms of beer.
C) the demand for beer.
D) an undesirable trade.

Question 32

If the consumer has the same tax bill under a head tax as under an income tax,then the consumer will be indifferent between the two taxes.

Question 33

Comparing a market basket A to other market baskets,we can say that for a typical consumer,A is preferred to baskets to the

A) southwest but less preferred to baskets to the northeast.
B) northeast but less preferred to baskets to the southwest.
C) northwest but less preferred to baskets to the southeast.
D) southeast but less preferred to baskets to the northwest .

Question 34

When a consumer spends all of the income,it must be true that they are maximizing utility.

Question 35

An indifference curve shows the baskets of goods which

A) have the same marginal values.
B) the consumer can purchase,given his income and the prices he faces.
C) are the most preferred of the baskets within his budget.
D) are all equally desirable,providing the consumer with some fixed level of satisfaction.

Question 36

In comparing one market basket,A,to others to the northwest or southeast,we can say that a typical consumer will

A) prefer A to any other market basket.
B) prefer any other market basket to A.
C) be indifferent between A and any other market basket.
D) find any of the above are possible.

Question 37

The cardinal utility approach has exactly the same implications as the indifference curve approach.

Question 38

Goods X and Y

For the following questions, assume that good X is on the horizontal axis and good Y is on the vertical axis in the consumer-choice diagram. PX denotes the price of good X, PY is the price of good Y, and I is the consumer's income. Unless otherwise stated, the consumer's preferences are assumed to satisfy the standard assumptions.


-Refer to Goods X and Y.If the marginal rate of good X in terms of good Y is large,then the indifference curve will be

A) convex.
B) concave.
C) steep.
D) flat.

Question 39

If the marginal value of 1 bottle of shampoo is 4 soap bars,then

A) the absolute price of shampoo is 4 times the absolute price of a soap bar.
B) trading away 1 bottle of shampoo for 4 bars of soap will not affect the consumer's level of satisfaction.
C) the consumer's optimum contains 4 times as many bars of soap as bottles of shampoo.
D) shampoo provides 4 times as much satisfaction to the consumer as does soap.

Question 40

A utility maximizing person gets marginal utility of 20 from consuming their last piece of bread and of 10 from consuming their last glass of milk.If a piece of bread costs 5 cents,then a glass of milk must cost 20 cents.

Question 41

Goods X and Y

For the following questions, assume that good X is on the horizontal axis and good Y is on the vertical axis in the consumer-choice diagram. PX denotes the price of good X, PY is the price of good Y, and I is the consumer's income. Unless otherwise stated, the consumer's preferences are assumed to satisfy the standard assumptions.


-Refer to Goods X and Y.If the indifference curves are horizontal,then we can conclude that

A) X does not affect the individual's utility.
B) Y does not affect the individual's utility.
C) both X and Y affect the individual's utility.
D) neither good affects the individual's utility.

Question 42

Goods X and Y

For the following questions, assume that good X is on the horizontal axis and good Y is on the vertical axis in the consumer-choice diagram. PX denotes the price of good X, PY is the price of good Y, and I is the consumer's income. Unless otherwise stated, the consumer's preferences are assumed to satisfy the standard assumptions.


-Refer to Goods X and Y.Which of the following can cause a parallel,outward shift in the budget line?

A) A rise in the consumer's income.
B) A rise in the marginal value of X in terms of Y.
C) A fall in the price of good X.
D) A fall in the price of good Y.

Question 43

Suppose a price index is formed to measure changes in the price level between 1999 to 2005.A price index based on changes in the cost of the basket of goods purchased by the typical consumer in 2005 is called a

A) relative price index.
B) consumer price index.
C) Laspeyres price index.
D) Paasche price index.

Question 44

Goods X and Y

For the following questions, assume that good X is on the horizontal axis and good Y is on the vertical axis in the consumer-choice diagram. PX denotes the price of good X, PY is the price of good Y, and I is the consumer's income. Unless otherwise stated, the consumer's preferences are assumed to satisfy the standard assumptions.


-Refer to Goods X and Y.If the indifference curves are downward sloping straight lines (rather than convex curves),then we can conclude that

A) X does not affect the individual's utility.
B) Y does not affect the individual's utility.
C) both X and Y affect the individual's utility.
D) neither good affects the individual's utility.

Question 45

If Odetta's marginal value of freedom fries is $8 per pound,then

A) Odetta will be indifferent if she trades 1 pound of freedom fries for $8 worth of all other goods.
B) Odetta thinks 1 pound of freedom fries is worth $8,2 pounds of freedom fries are worth $16,and so forth.
C) Odetta will not purchase any freedom fries if the price is more than $8 per pound.
D) Odetta must sacrifice $8 in currency for every pound of freedom fries she chooses to purchase.

Question 46

Goods X and Y

For the following questions, assume that good X is on the horizontal axis and good Y is on the vertical axis in the consumer-choice diagram. PX denotes the price of good X, PY is the price of good Y, and I is the consumer's income. Unless otherwise stated, the consumer's preferences are assumed to satisfy the standard assumptions.


-Refer to Goods X and Y.Suppose the consumer is spending all of his income buying some of both goods.If the marginal value of X is greater than the relative price of X,how can the consumer improve his level of satisfaction?

A) By purchasing more of both goods.
B) By purchasing more of good X and less of good Y.
C) By purchasing more of good Y and less of good X.
D) The consumer cannot improve his level of satisfaction because he is at the optimum.

Question 47

Goods X and Y

For the following questions, assume that good X is on the horizontal axis and good Y is on the vertical axis in the consumer-choice diagram. PX denotes the price of good X, PY is the price of good Y, and I is the consumer's income. Unless otherwise stated, the consumer's preferences are assumed to satisfy the standard assumptions.


-Refer to Goods X and Y.Suppose the consumer is at an optimum,spending all his income on good X.How are the marginal value of X and the relative price of X related at this corner solution?

A) The marginal value of X and the relative price of X must be equal.
B) The marginal value of X must be less than or equal to the relative price of X.
C) The marginal value of X must be greater than or equal to the relative price of X.
D) There is no definite relationship between the marginal value and the relative price of X.

Question 48

If the price of marshmallow exceeds the marginal value that the consumer places on marshmallows,then

A) the consumer is at the optimum.
B) the consumer's level of satisfaction would increase if he buys more marshmallows and less of other goods.
C) a surplus of marshmallows exists in the market.
D) the optimum contains fewer marshmallows than the consumer is currently buying.

Question 49

Suppose the consumer's indifference curves are concave (i.e.,bowed away from the origin)instead of convex.In this situation,

A) along an indifference curve,the marginal value of X is falling as more X and less Y is consumed.
B) all baskets on the budget line give the consumer the same level of satisfaction.
C) the marginal value of X must equal P_X/P_Y at the consumer's optimum.
D) the consumer's optimum is always a corner solution.

Question 50

Budget Lines

The following questions refer to the following diagram, which shows the budget lines faced by a consumer last year and this year.


-Refer to Budget Lines.Which of the following changes is consistent with the situation shown in the diagram?

A) The consumer's income fell.
B) The relative price of good X in terms of good Y fell.
C) The absolute price of good X rose,and the absolute price of good Y fell.
D) The absolute price of both goods rose,with the price of good X rising by the higher percentage.

Question 51

In using the composite-good convention in an indifference curve diagram,economists

A) compare the prices of market baskets at different points in time.
B) divide the world's production into two classes,goods and services.
C) divide the world's goods into two classes,high quality goods and low quality goods.
D) lump together all goods but one into a single good measured in a single unit,like dollars.

Question 52

Budget Lines

The following questions refer to the following diagram, which shows the budget lines faced by a consumer last year and this year.


-Refer to Budget Lines.If the consumer purchased basket D last year and basket A this year,

A) They are definitely better off this year than last year.
B) They were definitely better off last year than this year.
C) They could be equally well off in the two years.
D) It is impossible to tell wether they are better or worse off,even if we knew the person's preferences.

Question 53

Budget Lines

The following questions refer to the following diagram, which shows the budget lines faced by a consumer last year and this year.


-Refer to Budget Lines.If the consumer purchased basket B last year and purchases basket C this year,we can conclude that

A) the consumer is not behaving optimally.
B) the consumer's tastes changed between this year and last year.
C) the consumer's indifference curves cannot be convex.
D) the law of demand does not hold for this consumer.

Question 54

The price of wine has risen from $7 to $9 per bottle and the price of cheese has fallen from $6 to $5 per pound,while Anne's income has stayed fixed at $46 per week.Since the price changes,Anne has been buying 4 bottles of wine and 2 pounds of cheese per week.We can conclude that

A) Anne is indifferent about the price changes.
B) Anne is worse off after the price changes.
C) Anne is better off after the price changes.
D) Anne may be worse off,better off,or indifferent after the price changes.

Question 55

Suppose a price index is formed to measure changes in the price level between 1989 to 1995.If the price index focuses on the year-to-year costs of the typical market basket purchased in 1989,then the reported price changes

A) seem worse for consumers than they really are.
B) seem better for consumers than they really are.
C) accurately reflect changes in people's levels of satisfaction.
D) may overestimate or underestimate the effects of price changes,depending on whether consumers' indifference curves are relatively flat or steep.

Question 56

Goods X and Y

For the following questions, assume that good X is on the horizontal axis and good Y is on the vertical axis in the consumer-choice diagram. PX denotes the price of good X, PY is the price of good Y, and I is the consumer's income. Unless otherwise stated, the consumer's preferences are assumed to satisfy the standard assumptions.


-Refer to Goods X and Y.How would a budget line be affected if income and both prices all simultaneously doubled?

A) It would shift out so that all quantities are doubled.
B) It would shift in so that all quantities are halved.
C) It would not be affected.
D) The slope would be doubled.

Question 57

Budget Lines

The following questions refer to the following diagram, which shows the budget lines faced by a consumer last year and this year.


-Refer to Budget Lines.The only situation where we can conclude that this consumer's tastes must have changed is when we observe him

A) buying B last year and buying A this year.
B) buying D last year and buying A this year.
C) buying B last year and buying C this year.
D) buying D last year and buying C this year.

Question 58

Goods X and Y

For the following questions, assume that good X is on the horizontal axis and good Y is on the vertical axis in the consumer-choice diagram. PX denotes the price of good X, PY is the price of good Y, and I is the consumer's income. Unless otherwise stated, the consumer's preferences are assumed to satisfy the standard assumptions.


-Refer to Goods X and Y.When the price of good X rises,what happens to the budget line?

A) The budget line shifts in,with no change in the slope.
B) The budget line becomes flatter,and the horizontal intercept moves to the right.
C) The budget line becomes steeper,with no change in the vertical intercept.
D) The budget line pivots about the horizontal intercept,with the vertical intercept moving up.

Question 59

Goods X and Y

For the following questions, assume that good X is on the horizontal axis and good Y is on the vertical axis in the consumer-choice diagram. PX denotes the price of good X, PY is the price of good Y, and I is the consumer's income. Unless otherwise stated, the consumer's preferences are assumed to satisfy the standard assumptions.


-Refer to Goods X and Y.Which of the following would cause the vertical intercept to move upwards?

A) A decrease in the price of good Y.
B) An increase in the price of good X.
C) An increase in the price of good Y
D) A decrease in the price of good Y.

Question 60

Suppose a price index is formed to measure changes in the price level between 2005 to 2010.To form a Laspeyres price index,one would

A) compare the cost of the typical basket of goods purchased in 2005 with the cost of the typical basket of goods purchased in 2010.
B) calculate the increase in the cost of the typical market basket purchased in 2005.
C) calculate the increase in the cost of the typical market basket purchased in 2010.
D) take the typical basket of goods purchased in 2007,and compare the costs of that basket in 2005 and 2010.

Question 61

Consider an income tax and a head tax,the sizes of which have been set so that the government collects the same amount of money under each tax.Which tax does the consumer prefer?

A) The consumer is indifferent between the two taxes,since he pays the same amount of money under each tax.
B) The consumer prefers the head tax,because it does not lower the relative wage as does the income tax.
C) The consumer prefers the income tax,because it can be avoided by increasing the amount of leisure time consumed.
D) The consumer may prefer either tax,depending on whether the income tax increases or decreases the number of hours of work at the optimum.

Question 62

If the price of good X goes up and the price of good Y goes down,then it is possible for

A) The person is better off than before.
B) The person is worse off than before.
C) The person is no better or worse off than before.
D) All of the above are possible.

Question 63

Last year,the price of heating oil was $4 per gallon,and Jonetta purchased 100 gallons of heating oil.This year,the price of heating oil falls to $3 per gallon while Jonetta's income is unchanged.Jonetta decides to share her good fortune by giving her retired father a gift of $100.Consider an indifference curve-budget line diagram with heating oil on the horizontal axis and "all other goods" on the vertical axis.

Question 64

The accompanying diagram shows the effect of levying an income tax on the consumer.The pre-tax optimum is at point A,and the post-tax optimum is at point B. To measure the amount of tax money collected by the government,one uses the vertical distance between points

A) A and B.
B) A and D.
C) B and C.
D) B and D.

Question 65

Consider the following:

Question 66

A utility maximizing person has a utility function such that their marginal rate of substitution equals the amount of good Y they consume divided by the amount of good X that they consume (i.e.MRS = Y/X).If the prices of goods X and Y are the same,then the person will

A) consume more X than Y.
B) consume more Y than X.
C) consume equal amounts of X and Y.
D) we must know the person's income before coming to a conclusion.

Question 67

All of the following can be true about the optimal basket consumed by a consumer,except

A) The basket is on the budget line.
B) The person is spending all of their money on the basket.
C) The basket is on the highest indifference curve.
D) The budget line is tangent to an indifference curve at the optimal basket.

Question 68

Suppose leisure is on the horizontal axis and dollars are on the vertical axis in the consumer-choice diagram.What happens to the budget line when a head tax is imposed?

A) The budget line shifts inward,but it may become steeper or flatter depending on the size of the head tax.
B) The budget line pivots about the horizontal intercept,becoming steeper.
C) The budget line become flatter,with the vertical intercept falling and the horizontal intercept remaining fixed.
D) There is an inward,parallel shift in the budget line.

Question 69

Suppose the marginal value of bread in terms of wine is 1/2 bottle of wine per loaf of bread,while the relative price of bread in terms of wine is 1/4 bottle of wine per loaf of bread.Explain how the consumer can adjust his purchases to raise his level of satisfaction.

Question 70

Mathew has the utility function U = (where Y represents apples and X represents hot dogs),income of $20,and is deciding how to allocate that income between apples and hot dogs.Both hot dogs and apples cost $1.00 each.

Question 71

At a corner solution,which of the following is know to be true?

A) The slope of the indifference curve equals the slope of the budget line.
B) The slope of the indifference curve is greater than the slope of the budget line.
C) The slope of the indifference curve is less than the slope of the budget line.
D) The slope of the indifference curve does not equal the slope of the budget line.

Question 72

Suppose the price of cheese has recently risen from $4 to $6 per pound,while the price of fruit has fallen from $8 to $6 per pound.During this time,Miguel's income has stayed fixed at $48 per week.Before the price changes,Miguel had been buying 4 pounds of cheese and 4 pounds of fruit per week.Since the price changes,he has been buying 2 pounds of cheese and 6 pounds of fruit weekly.Assuming Miguel's preferences have not changed,is it possible to say whether the price changes have made Miguel better off or worse off? Explain.

Question 73

When there are two goods (X and Y),the consumer's optimum is typically found by locating the basket where the marginal value of X in terms of Y equals P_X/P_Y.Explain in words what this equality means,and describe two situations where the consumer's optimum is not characterized by this equation.

Question 74

The price of good X is $2.00 and the price of good Y is $1.00.Last year,the price of good X was $1.00 and the price of good Y was $2.00.If a consumer has $100,draw there their budget line for each year (label them accordingly).Add as many indifference curves as needed to show a situation in which the consumer is no better or worse off this year than they were last year.Be sure to label their optimal baskets for both years.Explain why what you have drawn is correct.

Question 75

A utility maximizing person gets marginal utility from consuming their last orange and apple of 5 and 10 respectively.If apples cost 90 cents a piece,the oranges must cost

A) $0.45 a piece.
B) $0.90 a piece.
C) $1.80 a piece.
D) $2.70 a piece.

Question 76

In order to identify differences in preferences among various countries,one would look for evidence that

A) indifference curves from different countries cross.
B) prices for goods differ among countries.
C) different market baskets are chosen among different nationalities.
D) higher income countries choose baskets with more of all goods.

Question 77

Explain why crossing indifference curves would lead to a logical inconsistency.