Deck 21: The Theory of Consumer Choice

Question 1

The marginal rate of substitution is the slope of the budget constraint.

Answer 1

False

Question 2

The marginal rate of substitution is the slope of the indifference curve.

Answer 2

True

Question 3

If goods A and B are perfect substitutes,then the marginal rate of substitution of good A for good B is constant.

Answer 3

True

Question 4

The slope of the budget constraint reveals the relative price of good X compared to good Y.

Question 5

At a consumer's optimal choice,the consumer chooses the combination of goods that equates the marginal rate of substitution and the price ratio.

Question 6

The indifference curves for perfect substitutes are straight lines.

Question 7

A consumer's budget constraint for goods X and Y is determined by how much the consumer likes good X relative to good Y.

Question 8

When two goods are perfect complements,the indifference curves are right angles.

Question 9

The indifference curves for left shoes and right shoes are right angles.

Question 10

The indifference curves for nickels and dimes are straight lines.

Question 11

The theory of consumer choice illustrates that people face tradeoffs,which is one of the Ten Principles of Economics.

Question 12

If consumers purchase more of a good when their income rises,the good is a normal good.

Question 13

A budget constraint illustrates bundles that a consumer prefers equally,while an indifference curve illustrates bundles that are equally affordable to a consumer.

Question 14

The marginal rate of substitution between goods A and B measures the price of A relative to the price of B.

Question 15

At a consumer's optimal choice,the consumer chooses the combination of goods such that the ratio of the marginal utilities equals the ratio of the prices.

Question 16

For a typical consumer,indifference curves can intersect if they satisfy the property of transitivity.

Question 17

For a typical consumer,most indifference curves are bowed inward.

Question 18

The slope at any point on an indifference curve equals the absolute price at which a consumer is willing to substitute one good for the other.

Question 19

When two goods are perfect substitutes,the indifference curves are right angles.

Question 20

For a typical consumer,most indifference curves are downward sloping.

Question 21

Draw a budget constraint that is consistent with the following prices and income.
Income = 200
P_Y = 50
P_X = 25
a.
Demonstrate how your original budget constraint would change if income increases to 500.
b.
Demonstrate how your original budget constraint would change if P_Y decreases to 20.
c.
Demonstrate how your original budget constraint would change if P_X increases to 40.

Question 22

Answer the following questions based on the table.A consumer is able to consume the following bundles of rice and beans when the price of rice is $2 and the price of beans is $3.

a.
How much is this consumer's income?
b.
Draw a budget constraint given this information.Label it B.
c.
Construct a new budget constraint showing the change if the price of rice falls $1.Label this C.
d.
Given the original prices for rice ($2)and beans ($3),construct a new budget constraint if this consumer's income increased to $48.Label this D.

Question 23

All points on a demand curve are optimal consumption points.

Question 24

A rise in the interest rate will generally result in people consuming less when they are old if the substitution effect outweighs the income effect.

Question 25

The substitution effect in the work-leisure model induces a person to work less in response to higher wages,which tends to make the labor-supply curve slope upward.

Question 26

Katie wins $1 million in her state's lottery.If Katie drastically reduces the number of hours she works after she wins the money,we can infer that the income effect is larger than the substitution effect for her.

Question 27

Economists have found evidence of a Giffen good when studying the consumption of rice in the Chinese province of Hunan.

Question 28

If a consumer purchases more of good A when her income falls,good A is an inferior good.

Question 29

Some economists have advocated reducing the taxation of interest and other capital income,arguing that such a policy change would raise the after-tax interest rate that savers can earn and would thereby encourage people to save more.

Question 30

The income effect of a price change is unaffected by whether the good is a normal or inferior good.

Question 31

Economists use the term Giffen good to describe a good that violates the law of demand.

Question 32

A rise in the interest rate will generally result in people consuming more when they are old if the substitution effect outweighs the income effect.

Question 33

If a consumer purchases more of good B when his income rises,good B is an inferior good.

Question 34

Giffen goods are inferior goods for which the income effect dominates the substitution effect.

Question 35

A rational person can have a negatively-sloped labor supply curve.

Question 36

The substitution effect of a price change is the change in consumption that results from the movement to a new indifference curve.

Question 37

The income effect in the work-leisure model induces a person to work less in response to higher wages,which tends to make the labor-supply curve slope backward.

Question 38

The income effect of a price change is the change in consumption that results from the movement to a new indifference curve.

Question 39

The direction of the substitution effect is not influenced by whether the good is normal or inferior.

Question 40

Susie wins $1 million in her state's lottery.If Susie keeps working after she wins the money,we can infer that the income effect is larger than the substitution effect for her.

Question 41

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

Question 42

Using the graph shown,construct a demand curve for M&M's given an income of $10.

Question 43

Explain the difference between inferior and normal goods.As a developing economy experiences increases in income (measured by GDP),what would you predict to happen to demand for inferior goods?

Question 44

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

Question 45

The theory of consumer choice provides the foundation for understanding the

A) structure of a firm.
B) profitability of a firm.
C) demand for a firm's product.
D) supply of a firm's product.

Question 46

Just as the theory of the competitive firm provides a more complete understanding of supply,the theory of consumer choice provides a more complete understanding of

A) demand.
B) profits.
C) production possibility frontiers.
D) wages.

Question 47

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

Question 48

Which of the following statements is correct?

A) The theory of consumer choice provides a more complete understanding of supply,just as the theory of the competitive firm provides a more complete understanding of demand.
B) The theory of consumer choice provides a more complete understanding of demand,just as the theory of the competitive firm provides a more complete understanding of supply.
C) Monetary theory provides a more complete understanding of demand,just as the theory of the competitive firm provides a more complete understanding of supply.
D) The theory of public choice provides a more complete understanding of supply,just as the theory of the competitive firm provides a more complete understanding of demand.

Question 49

Karen,Tara,and Chelsea each buy ice cream and paperback novels to enjoy on hot summer days.Ice cream costs $5 per gallon,and paperback novels cost $8 each.Karen has a budget of $80,Tara has a budget of $60,and Chelsea has a budget of $40 to spend on ice cream and paperback novels.Who can afford to purchase 8 gallons of ice cream and 5 paperback novels?

A) Karen,Tara,and Chelsea
B) Karen only
C) Tara and Chelsea but not Karen
D) none of the women

Question 50

How are the following three questions related: 1)Do all demand curves slope downward? 2)How do wages affect labor supply? 3)How do interest rates affect household saving?

A) They all relate to macroeconomics.
B) They all relate to monetary economics.
C) They all relate to the theory of consumer choice.
D) They are not related to each other in any way.

Question 51

Which of the following does not represent a tradeoff facing a consumer?

A) choosing to purchase more of all goods
B) choosing to spend more leisure time and less working time
C) choosing to spend more now and consume less in the future
D) choosing to purchase less of one good in order to purchase more of another good

Question 52

Graphically demonstrate the conditions associated with a consumer optimum.Carefully label all curves and axes.

Question 53

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

Question 54

The theory of consumer choice examines

A) the determination of output in competitive markets.
B) the tradeoffs inherent in decisions made by consumers.
C) how consumers select inputs into manufacturing production processes.
D) the determination of prices in competitive markets.

Question 55

Assume that a person consumes two goods,Coke and Snickers.Use a graph to demonstrate how the consumer adjusts his/her optimal consumption bundle when the price of Coke decreases.Carefully label all curves and axes.What will happen to consumption if Coke is a normal good? What will happen to consumption if Coke is an inferior good? (Remember to explain the possible change when the income effect dominates and when the substitution effect dominates. )

Question 56

Draw indifference curves that reflect the following preferences.
a.
pencils with white erasers and pencils with pink erasers
b.
left shoes and right shoes
c.
potatoes and rice
d.
income and polluted water

Question 57

Assume that a consumer faces the following budget constraints.
a.
Assuming that income is the same on both occasions,describe the difference in relative prices between Panel A and Panel B.
b.
If income in Panel B is $126,what is the price of good X?
c.
If income in Panel A is $84,what is the price of good Y?
d.
Assuming that the price of good X is the same on both occasions,describe the difference in income and price of good Y between Panel A and Panel B.

Question 58

When a consumer spends less time enjoying leisure and more time working,she has

A) lower income and therefore cannot afford more consumption.
B) lower income and therefore can afford more consumption.
C) higher income and therefore cannot afford more consumption.
D) higher income and therefore can afford more consumption.

Question 59

Janet knows that she will ultimately face retirement.Assume that Janet will experience two periods in her life,one in which she works and earns income,and one in which she is retired and earns no income.Janet can earn $250,000 during her working period and nothing in her retirement period.She must both save and consume in her work period and can earn 10 percent interest on her savings.
a.
Use a graph to demonstrate Janet's budget constraint.
b.
On your graph,show Janet at an optimal level of consumption in the work period equal to $150,000.What is the implied optimal level of consumption in her retirement period?
c.
Now,using your graph from part b above,demonstrate how Janet will be affected by an increase in the interest rate on savings to 14 percent.Discuss the role of income and substitution effects in determining whether Janet will increase,or decrease her savings in the work period.

Question 60

The theory of consumer choice most closely examines which of the following Ten Principles of Economics?

A) People face trade-offs.
B) The cost of something is what you give up to get it.
C) Trade can make everyone better off.
D) Markets are usually a good way to organize economic activity.

Question 61

Karen,Tara,and Chelsea each buy ice cream and paperback novels to enjoy on hot summer days.Ice cream costs $5 per gallon,and paperback novels cost $8 each.Karen has a budget of $80,Tara has a budget of $60,and Chelsea has a budget of $40 to spend on ice cream and paperback novels.Which of the following statements is correct?

A) Each woman faces the same budget constraint.
B) The slope of the budget constraint is the same for each woman.
C) The area underneath the budget constraint is larger for Chelsea than for Karen.
D) All of the above are correct.

Question 62

A consumer who doesn't spend all of her income

A) would be at a point outside of her budget constraint.
B) would be at a point inside her budget constraint.
C) must not be consuming positive quantities of all goods.
D) must be consuming at a point where her budget constraint touches one of the axes.

Question 63

Figure 21-1

-Refer to Figure 21-1.A consumer that chooses to spend all of her income could be at which point(s)on the budget constraint?

A) A only
B) E only
C) B,C,or D only
D) A,B,C,or D only

Question 64

Suppose a consumer has an income of $800 per month and that she spends her entire income each month on beer and bratwurst.The price of a pint of beer is $5,and the price of a bratwurst is $4.Which of the following combinations of beers and bratwursts represents a point that would lie directly on the consumer's budget constraint?

A) 160 beers and 200 bratwursts
B) 40 beers and 50 bratwursts
C) 80 beers and 100 bratwursts
D) 80 beers and 0 bratwursts

Question 65

Assume that a college student spends her income on mac-n-cheese and CDs.The price of one box of mac-n-cheese is $1,and the price of one CD is $12.If she has $100 of income,she could choose to consume

A) 15 boxes of mac-n-cheese and 6 CDs.
B) 20 boxes of mac-n-cheese and 7 CDs.
C) 10 boxes of mac-n-cheese and 8 CDs.
D) 30 boxes of mac-n-cheese and 6 CDs.

Question 66

Suppose a consumer has an income of $800 per month and that she spends her entire income each month on beer and bratwurst.The price of a pint of beer is $5,and the price of a bratwurst is $4.Which of the following combinations of beers and bratwursts represents a point that would lie to the exterior of the consumer's budget constraint?

A) 160 beers and 200 bratwursts
B) 40 beers and 50 bratwursts
C) 80 beers and 100 bratwursts
D) 160 beers and 0 bratwursts

Question 67

Figure 21-1

-Refer to Figure 21-1.Which point in the figure showing a consumer's budget constraint represents the consumer's income divided by the price of a CD?

A) point A
B) point C
C) point D
D) point E

Question 68

Figure 21-2

-Refer to Figure 21-2.Which points are affordable?

A) W,X,and Y only
B) Z only
C) V,W,X,and Y only
D) V,W,X,Y,and Z

Question 69

Figure 21-1

-Refer to Figure 21-1.All of the points identified in the figure represent affordable consumption options with the exception of

A) A.
B) E.
C) A and E.
D) None.All points are affordable.

Question 70

Consider two goods,books and hamburgers.The slope of the consumer's budget constraint is measured by the

A) consumer's income divided by the price of hamburgers.
B) relative price of books and hamburgers.
C) consumer's marginal rate of substitution.
D) number of books purchased divided by the number of hamburgers purchased.

Question 71

Assume that a college student spends her income on books and pizza.The price of a pizza is $8,and the price of a book is $15.If she has $100 of income,she could choose to consume

A) 8 pizzas and 4 books.
B) 4 pizzas and 5 books.
C) 9 pizzas and 3 books.
D) 4 pizzas and 3 books.

Question 72

Figure 21-2

-Refer to Figure 21-2.A consumer that chooses to spend all of her income could be at which point(s)on the budget constraint?

A) V only
B) Z only
C) V,W,X,or Y only
D) W,X,or Y only

Question 73

Figure 21-2

-Refer to Figure 21-2.Which of the following statements is not correct?

A) Points W,X,and Y all cost the consumer the same amount of money.
B) Point Z is unaffordable for the consumer given his budget constraint.
C) Point V costs less than point Z.
D) Points W,X,and Y give the consumer the same level of satisfaction.

Question 74

Karen,Tara,and Chelsea each buy ice cream and paperback novels to enjoy on hot summer days.Ice cream costs $5 per gallon,and paperback novels cost $8 each.Karen has a budget of $80,Tara has a budget of $60,and Chelsea has a budget of $40 to spend on ice cream and paperback novels.Who can afford to purchase 5 gallons of ice cream and 8 paperback novels?

A) Karen,Tara,and Chelsea
B) Karen only
C) Tara and Chelsea but not Karen
D) none of the women

Question 75

An increase in income will cause a consumer's budget constraint to

A) shift outward,parallel to its initial position.
B) shift inward,parallel to its initial position.
C) pivot around the horizontal axis.
D) pivot around the vertical axis.

Question 76

Suppose a consumer has an income of $800 per month and that she spends her entire income each month on beer and bratwurst.The price of a pint of beer is $5,and the price of a bratwurst is $4.Which of the following combinations of beers and bratwursts represents a point that would lie to the interior of the consumer's budget constraint?

A) 160 beers and 200 bratwursts
B) 40 beers and 50 bratwursts
C) 80 beers and 100 bratwursts
D) 160 beers and 0 bratwursts

Question 77

Karen,Tara,and Chelsea each buy ice cream and paperback novels to enjoy on hot summer days.Ice cream costs $5 per gallon,and paperback novels cost $8 each.Karen has a budget of $80,Tara has a budget of $60,and Chelsea has a budget of $40 to spend on ice cream and paperback novels.Who can afford to purchase 4 gallons of ice cream and 5 paperback novels?

A) Karen,Tara,and Chelsea
B) Karen only
C) Karen and Tara but not Chelsea
D) none of the women

Question 78

A budget constraint illustrates the

A) prices that a consumer chooses to pay for products he consumes.
B) purchases made by consumers.
C) consumption bundles that a consumer can afford.
D) consumption bundles that give a consumer equal satisfaction.

Question 79

When the price of a shirt falls,the

A) quantity of shirts demanded falls.
B) quantity of shirts demanded rises.
C) quantity of shirts supplied rises.
D) demand for shirts falls.

Question 80

Suppose a consumer spends his income on CDs and DVDs.If his income decreases,the budget constraint for CDs and DVDs will

A) shift outward,parallel to the original budget constraint.
B) shift inward,parallel to the original budget constraint.
C) rotate outward along the CD axis because he can afford more CDs.
D) rotate outward along the DVD axis because he can afford more DVDs.