The Theory Of Consumer Choice Verified Test Bank Chapter 22 - Principles of Microeconomics ANZ Edition Test Bank by Joshua Gans. DOCX document preview.
CHAPTER 22 – The theory of consumer choice
TRUE/FALSE
1. The budget constraints shows the different possible combinations of goods that can be consumed at current prices and using all the consumer’s income.
DIF: Easy TOP: The budget constraint: What the consumer can afford
2. When the price of a good rises, consumers are willing to pay for fewer units, so there is a decrease in demand.
DIF: Easy TOP: Income and substitution effects
3. The slope of a budget constraint is equal to the relative prices of the two goods.
DIF: Easy TOP: The budget constraint: What the consumer can afford
4. An increase in income changes the slope of the budget constraint towards the cheaper good.
DIF: Easy TOP: Income and substitution effects
5. A consumer who chooses to consume at a point inside her budget constraint will have to borrow money to pay for her consumption.
DIF: Moderate TOP: The budget constraint: What the consumer can afford
6. Indifference curves can be used to rank all possible bundles of commodities.
DIF: Easy TOP: Representing preferences with indifference curves
7. When a consumer’s consumption of one good is reduced, consumption of the other good must be reduced to keep the consumer equally happy due to opportunity costs.
DIF: Moderate TOP: Representing preferences with indifference curves
8. A consumer always prefers to be on a higher indifference curve to a lower indifference curve.
DIF: Easy TOP: Representing preferences with indifference curves
9. The indifference curve maps out the consumption bundles that give the consumer the same level of satisfaction.
DIF: Easy TOP: Representing preferences with indifference curves
10. Bundles of goods on a consumer’s indifference curve have the same total cost.
DIF: Moderate TOP: Representing preferences with indifference curves
11. To reach a higher indifference curve a consumer must either obtain an income increase or be offered the goods at lower prices.
DIF: Easy TOP: Representing preferences with indifference curves
12. The slope of an indifference curve reflects the consumer’s willingness to exchange one commodity for another.
DIF: Easy TOP: Representing preferences with indifference curves
13. 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.
DIF: Easy TOP: Representing preferences with indifference curves
14. When goods are not easy to substitute for each other, the indifference curves are less bowed, and when goods are easy to substitute, the indifference curves are very bowed.
DIF: Moderate TOP: Four properties of indifference curves
15. The marginal rate of substitution is also known as the slope of the budget constraint.
DIF: Easy TOP: Representing preferences with indifference curves
16. If two goods are perfect substitutes, their indifference curves will be right-angled; if two goods are perfect complements, their indifference curves will be linear.
DIF: Moderate TOP: Perfect complements
17. Economists define utility as a measure of satisfaction that a consumer receives from a bundle of goods.
DIF: Easy TOP: FYI: Utility – an alternative way to describe preferences and optimisation
18. If a good is a perfect substitute, then the MRS will be constant no matter how much of any one good the consumer possesses.
DIF: Easy TOP: Perfect substitutes
19. If the budget constraint crosses an indifference curve in two places, both these points will be below the consumer’s optimal level of consumption.
DIF: Easy TOP: The consumer’s optimum choices
20. Unless commodities are perfect complements or perfect substitutes, a price change will always result in an income effect.
DIF: Easy TOP: How changes in prices affect a consumer’s choices
21. The point at which the indifference curve is tangent to the budget constraint is called an optimum.
DIF: Easy TOP: The consumer’s optimum choices
22. An increase in income will cause the budget constraint to shift outward and will allow the consumer to be able to choose between two possible optimum choices.
DIF: Easy TOP: Income and substitution effects
23. If a consumer wants less of a good when his income rises, it is an inferior good.
DIF: Easy TOP: Income and substitution effects
24. The income effect is the change in consumption that results when a price change moves the consumer to a higher or lower indifference curve.
DIF: Easy TOP: Income and substitution effects
25. The theory of consumer choice has limited application to the work-leisure decision, as leisure time does not have a monetary value.
DIF: Easy TOP: How do wages affect labour supply
26. The substitution effect and income effect always reinforce each other.
DIF: Easy TOP: Income and substitution effects
27. The substitution effect is the change in consumption that results when a price change moves the consumer along the same indifference curve.
DIF: Easy TOP: Income and substitution effects
28. For Giffen goods, the income effect dominates the substitution effect.
DIF: Easy TOP: Do all demand curves slope downwards?
29. It is plausible for the labour supply curve to slope either upwards or downwards.
DIF: Moderate TOP: How do wages affect labour supply.
30. If an in-kind transfer forces the recipient to consumer more of a good than he would on his own, then the recipient will always prefer a cash transfer.
DIF: Moderate TOP: Do the poor prefer to receive cash or in-kind transfers?
31. With respect to the utility of the consumer, an in-kind transfer can be equivalent to a cash transfer.
DIF: Moderate TOP: Do the poor prefer to receive cash or in-kind transfers?
MULTIPLE CHOICE
1. A utility-maximising individual will consume a bundle of goods that is:
A. | on the budget constraint |
B. | below the budget constraint |
C. | either on or below the budget constraint |
D. | above the budget constraint |
DIF: Moderate TOP: The consumer’s optimal choices
2. The theory of consumer choice provides the foundation for understanding:
A. | the structure of production |
B. | the effect of advertising on brand preferences |
C. | product demand |
D. | the most efficient pricing strategy for firms |
DIF: Easy TOP: The budget constraint: What the consumer can afford
3. As a general rule, the theory of consumer choice provides insight into the behaviour of:
A. | individuals who make unconstrained choices |
B. | individuals who make constrained choices |
C. | individuals who are unaware of how to maximise their wellbeing |
D. | irrational consumers |
DIF: Easy TOP: The budget constraint: What the consumer can afford
4. Indifference curves can:
A. | cross, but only if one good is a Giffen good |
B. | cross, but only if one good is an inferior good |
C. | cross, but only if both goods are inferior goods |
D. | can never cross |
DIF: Moderate TOP: Four properties of indifference curves
5. A budget constraint:
A. | represents the bundles of consumption that makes a consumer equally happy |
B. | shows the consumption bundles that a consumer can afford |
C. | reflects the desire by consumers to increase their income |
D. | shows the prices that a consumer chooses to pay for products he consumes |
DIF: Easy TOP: The budget constraint: What the consumer can afford
6. Amy buys sushi and miso for lunch. Her weekly budget for lunch is $48. If the price of sushi is $1.50 a piece and the price of miso is $1.20 a cup, then during the week Amy could choose to consume:
A. | 48 sushi pieces and 20 cups of miso |
B. | 25 sushi pieces and 10 cups of miso |
C. | 20 sushi pieces and 15 cups of miso |
D. | 12 sushi pieces and 26 cups of miso |
DIF: Easy TOP: The budget constraint: What the consumer can afford
7. When income increases, a budget constraint will:
A. | shift inward, parallel to its initial position |
B. | shift outward, parallel to its initial position |
C. | pivot outward around the Y-axis |
D. | pivot outward around the X-axis |
DIF: Moderate TOP: Income and substitution effects
Graph 22-1
8. Refer to Graph 22-1. Which of the points on the graph shown reflects the choice of a consumer who chooses not to spend her entire income?
A. | A |
B. | B |
C. | C |
D. | D |
DIF: Moderate TOP: The budget constraint: What the consumer can afford
9. Refer to Graph 22-1. A consumer who chooses to spend all of her income will be at point(s):
A. | C |
B. | E |
C. | C or E |
D. | A, B or C |
DIF: Moderate TOP: The budget constraint: What the consumer can afford
10. Refer to Graph 22-1. All of the points identified on the graph shown represent possible consumption options with the exception of:
A. | none |
B. | C |
C. | D |
D. | E |
DIF: Difficult TOP: The budget constraint: What the consumer can afford
Graph 22-2
11. Refer to Graph 22-2. Which of the graphs shown reflects a decrease in the price of good X only?
A. | A |
B. | B |
C. | C |
D. | D |
DIF: Moderate TOP: The budget constraint: What the consumer can afford
12. Refer to Graph 22-2. Which of the graphs shown reflects an increase in the price of good Y?
A. | A |
B. | B |
C. | C |
D. | D |
DIF: Moderate TOP: The budget constraint: What the consumer can afford
13. Refer to Graph 22-2. Which of the graphs shown reflects an increase in income?
A. | A |
B. | B |
C. | C |
D. | D |
DIF: Moderate TOP: The budget constraint: What the consumer can afford
14. The indifference curves of perfect substitutes are:
A. | straight lines |
B. | at right angles |
C. | bowed inwards |
D. | bowed outwards |
DIF: Moderate TOP: Two examples of indifference curves
Graph 22-3
15. Refer to Graph 22-3. Using the figure in panel (a), if income is equal to $160, the price of good Y is:
A. | $1.20 |
B. | $3.20 |
C. | $2.66 |
D. | $8.00 |
DIF: Moderate TOP: The budget constraint: What the consumer can afford
16. Refer to Graph 22-3. Using the figure in panel (a), what is ratio of the price of X to the price of Y (i.e. PX/PY)?
A. | 50/1 |
B. | 5/1 |
C. | 1/5 |
D. | 1/50 |
DIF: Difficult TOP: The budget constraint: What the consumer can afford
17. 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. | 4/1 |
B. | 1/1 |
C. | 1/4 |
D. | 1/16 |
DIF: Difficult TOP: The budget constraint: What the consumer can afford
18. The indifference curves of perfect compliments are:
A. | straight lines |
B. | at right angles |
C. | bowed inwards |
D. | bowed outwards |
DIF: Moderate TOP: two extreme examples of indifference curves
19. Refer to Graph 22-3. If the budget constraint is $160 then from the panel (b) we can determine that the:
A. | price of X is $40 and the price of Y is $10 |
B. | price of Y is $40 and the price of X is $10 |
C. | price of X is $4 and the price of Y is $16 |
D. | price of Y is $4 and the price of X is $16 |
DIF: Moderate TOP: The budget constraint: What the consumer can afford NAR: 22-3
20. Indifference curves provide a way to graphically represent:
A. | the constraints faced by individuals |
B. | an individual’s preferences |
C. | the relative price of commodities |
D. | an income level sufficient to make an individual happy |
DIF: Easy TOP: Representing preferences with indifference curves
Graph 22-4
21. Refer to Graph 22-4. Based on this graph, which of the following statements is correct?
A. | point A is valued more than point B |
B. | point B is valued the same as point E |
C. | the bundle associated with point D contains more croissants than that associated with point |
D. | the bundles along indifference curve I1 are preferred to those along indifference curve I2 |
DIF: Difficult TOP: Representing preferences with indifference curves
22. Refer to Graph 22-4. A person who chooses to consume bundle C rather than bundle A is likely to:
A. | place a higher relative value on croissants than on coffee |
B. | place a higher relative value on coffee than on croissants |
C. | gain more satisfaction from bundle C than bundle A |
D. | gain more satisfaction from bundle B than bundle A |
DIF: Difficult TOP: Representing preferences with indifference curves
23. Refer to Graph 22-4. Which of the following statements is true?
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 |
DIF: Difficult TOP: Representing preferences with indifference curves
24. Refer to Graph 22-4. Which of the following statements is true for a consumer who moves from point C to point D?
A. | the consumer is indifferent between point C and point D |
B. | the consumer is likely to place a higher relative value on croissants at point C than at point D |
C. | it is difficult to compare the level of consumer satisfaction between points D and C |
D. | the consumer is definitely worse off |
DIF: Difficult TOP: Representing preferences with indifference curves
25. If the consumption of one good is increased, how must a consumer alter his consumption of another good in order to remain indifferent between two bundles?
A. | he must reduce his consumption of another good |
B. | he must increase his consumption of another good |
C. | he must not change his consumption of another good |
D. | he can reduce, increase or not change his consumption of another good |
DIF: Moderate TOP: Representing preferences with indifference curves
26. Suppose at the current consumption bundle, the marginal rate of substitution of pizza for pepsi is 4 litres of pepsi for every one pizza. If we took four litres of pepsi away from our consumer and gave them one extra pizza, which of the following statements would be correct?
A. | the consumer would be on a higher indifference curve |
B. | the consumer would be on a lower indifference curve |
C. | the consumer’s marginal rate of substitution of pepsi for pizza would rise |
D. | the consumer’s marginal rate of substitution of pepsi for pizza would fall |
DIF: Difficcult TOP: Representing preferences with indifference curves
27. If an indifference curve is bowed in toward the origin, the marginal rate of substitution is:
A. | different for each bundle along the indifference curve |
B. | likely to be constant for all bundles along the indifference curve |
C. | likely to be identical to the price ratio for each bundle along the indifference curve |
D. | not likely to reflect relative value of goods |
DIF: Moderate TOP: Representing preferences with indifference curves
28. The amount of a good that an individual has:
A. | is only affected by prices |
B. | affects the rate at which she is willing to trade |
C. | is only affected by income |
D. | will not affect the marginal rate of substitution |
DIF: Easy TOP: Representing preferences with indifference curves
29. As long as a consumer is on the same indifference curve:
A. | her preferences will not affect the marginal rate of substitution |
B. | she is unable to decide which bundle of goods to choose |
C. | she is indifferent among the points on that indifference curve |
D. | she is indifferent to all points which lie on any other indifference curves |
DIF: Moderate TOP: Representing preferences with indifference curves
30. A consumer:
A. | prefers higher indifference curves to lower indifference curves |
B. | is equally satisfied with any indifference curve |
C. | is generally unable to place all consumption bundles on an indifference curve |
D. | prefers indifference curves with positive slopes |
DIF: Easy TOP: Representing preferences with indifference curves
31. A consumer’s set of indifference curves provides a:
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 |
DIF: Easy TOP: Representing preferences with indifference curves
32. Which of the following is a property of indifference curves?
A. | indifference curves have positive slopes |
B. | indifference curves that cross are helpful in explaining differences in consumption choices |
C. | indifference curves are usually bowed in toward the origin |
D. | indifference curves are always linear and downward-sloping |
DIF: Moderate TOP: Representing preferences with indifference curves
33. When indifference curves are bowed inward toward the origin:
A. | people are less inclined to trade away goods that they have an abundance of |
B. | people can only increase satisfaction by consuming more of all commodities |
C. | it is unlikely that consumers will be willing to engage in trade |
D. | the marginal rate of substitution decreases as a consumer moves down an indifference curve |
DIF: Difficult TOP: Representing preferences with indifference curves
34. A bowed shaped indifference curve reflects a consumer’s:
A. | greater willingness to give up a good that she has an abundance of |
B. | lower willingness to give up a good that she has an abundance of |
C. | desire to specialise in the consumption of one good over another |
D. | unwillingness to substitute one good for another |
DIF: Moderate TOP: Representing preferences with indifference curves
35. When two goods are perfect substitutes they will have:
A. | indifference curves with a positive slope |
B. | indifference curves that cross |
C. | linear indifference curves |
D. | indifference curves that are right angles |
DIF: Moderate TOP: Perfect substitutes
36. When two goods are perfect substitutes, the marginal rate of substitution:
A. | increases as the abundance of one good increases |
B. | increases as the scarcity of one good increases |
C. | decreases as the scarcity of one good increases |
D. | is constant |
DIF: Moderate TOP: Four properties of indifference curves
37. American hotdogs are made by combining one bun with one sausage. American hotdog buns and sausages are a good example of:
A. | positively sloped indifference curves |
B. | perfect substitutes |
C. | crossing indifference curves |
D. | perfect complements |
DIF: Difficult TOP: Perfect complements
38. A plausible example of a perfect substitute is:
A. | left and right shoes |
B. | coke and pepsi cola |
C. | cars and bicycles |
D. | apples and chicken |
DIF: Easy TOP: Perfect complements
39. When economists describe preferences, they sometimes use the concept of:
A. | income |
B. | prices |
C. | markets |
D. | utility |
DIF: Easy TOP: FYI: Utility – an alternative way to describe preferences and optimisation
40. If the marginal rate of substitution of pepsi for pizza is six litres of pepsi for one pizza slice, and the price of pepsi is $1 per litre and the price of pizza is $3 per slice, then this consumer should:
A. | trade pepsi for pizza and end up on a higher indifference curve |
B. | trade pizza for pepsi and end up on a higher indifference curve |
C. | do nothing as they are already maximizing utility |
D. | we cannot say without more information |
DIF: difficult TOP: The consumer’s optimum choices
41. The combination of two goods a consumer chooses depends on his:
A. | demand and his supply |
B. | preferences and his demand |
C. | budget constraint and his preferences |
D. | budget constraint and his supply |
DIF: Easy TOP: Preferences: What the consumer wants
42. An optimising consumer will select a consumption bundle in which utility is maximised:
A. | and prices are minimised |
B. | and income is maximised |
C. | and indifference curves are linear |
D. | subject to constraints imposed by her budget |
DIF: Easy TOP: The consumer’s optimum choices
43. The optimum represents the:
A. | centre point on the highest indifference curve possible for the consumer |
B. | best combination of two goods that is attainable by the consumer |
C. | point at which an indifference curve crosses the consumer’s budget constraint |
D. | intersection of the consumer’s demand curve and the market supply curve |
DIF: Easy TOP: The consumer’s optimum choices
44. An optimising consumer will select a consumption bundle in which the:
A. | marginal rate of substitution is equal to income |
B. | marginal rate of substitution is equal to the relative price |
C. | ratio of expenditure shares equals the marginal rate of substitution |
D. | utility exceeds price |
DIF: Moderate TOP: The consumer’s optimum choices
45. If demand for a good falls as income rises, this is known as a:
A. | normal good |
B. | inferior good |
C. | Giffen good |
D. | the law of demand |
DIF: Easy TOP: How changes in income affect a consumer’s choices
46. At the optimum:
A. | the slope of the indifference curve is equal to the slope of the budget constraint |
B. | it is still possible for the consumer to increase his consumption of both goods |
C. | the indifference curve would intersect the budget constraint at its centre |
D. | the budget constraint would have a slope of 1 |
DIF: Easy TOP: The consumer’s optimum choices
Graph 22-5
47. Refer to Graph 22-5. In the figure shown, an optimising consumer is most likely to select the consumption bundle associated with:
A. | point A |
B. | point B |
C. | point C |
D. | point E |
DIF: Easy TOP: The consumer’s optimum choices
48. Refer to Graph 22-5. It will be possible for the consumer to reach I2 if:
A. | the price of Y decreases |
B. | the price of X decreases |
C. | income increases |
D. | all of the above are correct |
DIF: Difficult TOP: Optimisation: What the consumer chooses
49. Refer to Graph 22-5. If a consumer is at point D they could:
A. | increase their consumption of X and increase their consumption of Y and be better off |
B. | increase their consumption of X and reduce their consumption of Y and be better off |
C. | reduce their consumption of X and increase their consumption of Y and be better off |
D. | reduce their consumption of X and reduce their consumption of Y and be better off |
DIF: Difficult TOP: The consumer’s optimum choices
50. Refer to Graph 22-5. If a consumer is at point C and moved to point B they would be:
A. | better off because he or she is consuming more Y |
B. | better off because he or she is consuming less X |
C. | be no better off because they are still on the same budget line |
D. | worse off because they are on a lower indifference curve |
DIF: Easy TOP: The consumer’s optimum choices
51. If the income effect and substitution effect work in the same direction, then the good in question is a:
A. | normal good |
B. | inferior good |
C. | Giffen good |
D. | luxury good |
DIF: Difficult TOP: Income and substitution effects
52. When the price of a good decreases, ceteris paribus, the lower price:
A. | generally encourages the consumption of inferior goods |
B. | leads to a parallel shift of the linear budget constraint |
C. | will necessarily lead to a decrease in the consumption of goods whose price did not change |
D. | expands the consumer’s set of buying opportunities |
DIF: Moderate TOP: How changes in prices affect a consumer’s choices
Graph 22-6
53. Refer to Graph 22-6. Assume that the consumer depicted in the graph has an income of $40. The price of Skittles is $4 and the price of M&Ms is $8. This consumer will choose a consumption bundle where the marginal rate of substitution is:
A. | 2. |
B. | 1/2 |
C. | 1/3 |
D. | 2/3 |
DIF: Difficult TOP: How changes in prices affect a consumer’s choices
54. Refer to Graph 22-6. Assume that the consumer depicted in the graph has an income of $20. The price of Skittles is $2 and the price of M&Ms is $2. This consumer will choose to optimise by consuming:
A. | bundle A |
B. | bundle B |
C. | bundle C |
D. | bundle D |
DIF: Difficult TOP: How changes in prices affect a consumer’s choices
55. Refer to Graph 22-6. Assume that the consumer depicted in the graph faces prices and income such that she optimises at point A. According to the graph, what change allows the consumer to move to point B?
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 |
DIF: Difficult TOP: How changes in prices affect a consumer’s choices
56. When a consumer experiences a change in price, what two effects do economists consider?
A. | the preference effect and the budget effect |
B. | the income effect and the substitution effect |
C. | the price effect and the preference effect |
D. | the complement effect and the substitute effect |
DIF: Moderate TOP: How changes in prices affect a consumer’s choices
57. 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:
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 |
DIF: Difficult TOP: Income and substitution effects
Graph 22-7
58. Refer to Graph 22-7. If the consumer is currently at point A on the graph shown, a change to point B as a result of a decrease in the price of potato chips would show the:
A. | price effect |
B. | budget effect |
C. | substitution effect |
D. | income effect |
DIF: Difficult TOP: Income and substitution effects
59. Refer to Graph 22-7. If the consumer is currently at point B on the graph shown, a change to point C as a result of a decrease in the price of potato chips would show the:
A. | price effect |
B. | budget effect |
C. | substitution effect |
D. | income effect |
DIF: Difficult TOP: Income and substitution effects
60. A Giffen good is a good for which a(n):
A. | increase in the price raises the quantity demanded |
B. | increase in the price lowers the quantity demanded |
C. | increase in the price raises the quantity supplied |
D. | decrease in the price raises the quantity supplied |
DIF: Moderate TOP: Do all demand curves slope downwards?
61. Amy purchases only coffee and croissants. The substitution effect associated with a decrease in the price of a croissant will result in:
A. | a decrease in the consumption of croissants and an increase in the consumption of coffee |
B. | an increase in the consumption of croissants and a decrease in the consumption of coffee |
C. | only a decrease in the consumption of coffee |
D. | only an increase in the consumption of coffee |
DIF: Difficult TOP: Income and substitution effects
62. Amy purchases only coffee and croissants. If both coffee and croissants are normal goods, the income effect associated with a decrease in the price of croissants will result in a(n):
A. | increase in the consumption of croissants and a decrease in the consumption of coffee |
B. | decrease in the consumption of croissants and a decrease in the consumption of coffee |
C. | increase in the consumption of croissants and an increase in the consumption of coffee |
D. | decrease in the consumption of croissants and an increase in the consumption of coffee |
DIF: Difficult TOP: Income and substitution effects
63. Amy purchases only coffee and croissants. If coffee is an inferior good and croissants are normal goods, the income effect associated with an increase in the price of croissants will result in a(n):
A. | increase in the consumption of croissants and an increase in the consumption of coffee |
B. | increase in the consumption of croissants and a decrease in the consumption of coffee |
C. | decrease in the consumption of croissants and a decrease in the consumption of coffee |
D. | decrease in the consumption of croissants and an increase in the consumption of coffee |
DIF: Difficult TOP: Income and substitution effects
Graph 22-8
64. Refer to Graph 22-8. Assume that the consumer depicted in the graph has an income of $50, and the price of marshmallows is $2.50, and the price of chocolate chips is $5. The optimising consumer will choose to purchase which bundle of marshmallows and chocolate chips?
A. | bundle A |
B. | bundle B |
C. | bundle C |
D. | bundle D |
DIF: Difficult TOP: The consumer’s optimum choices
65. Refer to Graph 22-8. Assume that the consumer depicted in the graph has an income of $50 and currently optimises at point B. When the price of chocolate chips decreases to $2.50, the optimising consumer will choose to purchase how many units of marshmallows?
A. | four |
B. | five |
C. | 10 |
D. | 15 |
DIF: Difficult TOP: The consumer’s optimum choices
66. Refer to Graph 22-8. Assume that the consumer depicted in the graph has an income of $80. If the price of marshmallows is $4, the optimising consumer would choose to purchase:
A. | five marshmallows and five chocolate chips |
B. | 10 marshmallows and 10 chocolate chips |
C. | nine marshmallows and six chocolate chips |
D. | three marshmallows and nine chocolate chips |
DIF: Difficult TOP: The consumer’s optimum choices
67. Refer to Graph 22-8. Assume that the consumer depicted in the graph has an income of $20. Using the information above, which of the following price–quantity combinations would be on her demand curve for marshmallows if the price of chocolate chips is $2?
A. | $1, eight |
B. | $1, 14 |
C. | $2, seven |
D. | $2, three |
DIF: Difficult TOP: The consumer’s optimum choices
68. The backward bending portion of an individual labour supply curve is indicative of:
A. | a desire to increase work effort (hours) as wage rate rises |
B. | dominant income effects at higher levels of income |
C. | dominant income effects at lower levels of income |
D. | a desire to reduce work effort (hours) as wage rate falls |
DIF: Moderate TOP: How do wages affect labour supply?
69. An upward-sloping individual labour supply curve is indicative of:
A. | dominant substitution effects |
B. | dominant income effects |
C. | individuals that reduce work effort (hours) as income rises |
D. | an upward-sloping demand for leisure |
DIF: Moderate TOP: How do wages affect labour supply?
70. When leisure is a normal good, the income effect from an increase in wages is manifest in a(n):
A. | desire to consume more leisure |
B. | desire to consume less leisure |
C. | upward-sloping labour supply curve |
D. | shift in labour demand |
DIF: Moderate TOP: How do wages affect labour supply?
71. The substitution effect from an increase in wages is manifest in a:
A. | decrease in labour demand |
B. | desire to consume less leisure |
C. | desire to consume more leisure |
D. | backward-bending labour supply curve |
DIF: Moderate TOP: How do wages affect labour supply?
72. Jonathan is planning ahead for retirement and must decide how much to spend and how much to save while he’s working to have money to spend when he retires. When the income effect dominates the substitution effect, an increase in the interest rate on his savings is likely to:
A. | increase his saving |
B. | decrease his saving |
C. | have no effect on his saving |
D. | all of the above are possible |
DIF: Difficult TOP: How do interest rates affect household saving?
73. 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:
A. | decrease his saving |
B. | increase his saving |
C. | have no effect on his saving |
D. | all of the above are possible |
DIF: Moderate TOP: How do interest rates affect household saving?
74. 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:
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 |
DIF: Moderate TOP: Do the poor prefer to receive cash or in-kind transfers?
SHORT ANSWER
1. Consider the following graphs depicting budget constraints, then answer the questions below.
a. Which panel shows an increase in the price of X?
b. Does panel C show an increase or decrease in the price of good Y?
c. Which panel shows an increase in consumer income, if prices remain unchanged?
d. Which panel – if any – shows an equally propionate decrease in the price of both goods?
DIF: Easy TOP: The budget constraint: What the consumer can afford
2. Draw a budget constraint that is consistent with the following prices and income.
Income = 100
PY = 25
PX = 12.5
a. Demonstrate how your original budget constraint would change if income increased to 250.
b. Demonstrate how your original budget constraint would change if PY decreased to 10.
c. Demonstrate how your original budget constraint would change if PX increased to 20.
DIF: Difficult TOP: The budget constraint: What the consumer can afford
3. Assume that a consumer faces the budget constraints shown.
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 $320, what is the price of good X?
c. If income in panel a is $175, what is the price of good Y?
d. Give an example of prices that may produce the graphs in panel A and panel B (hint: what are the relative prices?)
DIF: Moderate TOP: The budget constraint: What the consumer can afford
4. Suppose you win a ‘grocery-grab’ at your local supermarket. This gives you 10 minutes to take as many groceries off the shelves as you can for free. Have you escaped the problem of scarcity in this situation?
DIF: Moderate TOP: The budget constraint: What the consumer can afford
5. List and briefly explain each of the four properties of indifference curves.
DIF: Moderate TOP: Representing preferences with indifference curves
6. Graphically demonstrate the conditions associated with a consumer optimum. Carefully label all curves and axes.
DIF: Moderate TOP: The consumer’s optimum choices
7. A person consumes two goods: Coke and Snickers. Use a graph to demonstrate how the consumer adjusts his 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).
DIF: Difficult TOP: How changes in prices affect a consumer’s choices
8. Using the graph shown, construct a demand curve for M&Ms, given an income of $10.
DIF: Difficult TOP: Income and substitution effects
9. 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.
DIF: Difficult TOP: Income and substitution effects
10. Use a graph to demonstrate how an individual labour supply curve is derived. Is it possible to generate a labour supply curve that is downward-sloping for all wage rates? Explain what conditions must be satisfied for this to occur.
DIF: Difficult TOP: How do wages affect labour supply?
11. Frida and Brent, two economists working on public policy, are discussing a compensation scheme to accompany the introduction of a new carbon tax. The scheme compensates households by giving them just enough money to put them back on the same indifference curve they were on before the introduction of the tax.
“This compensation scheme is pointless,” proclaims Brent. “If we put consumers back on the same indifference curve, they will purchase the same bundle of goods they did before and we won’t achieve any reduction in carbon emissions.”
“Nah, you’re so wrong,” argues Frida, “what matters is the relative prices of the goods. As long as they are different we can still lower carbon emissions”
Is Frida or Brent correct? Explain your reasoning.
DIF: Moderate TOP: Income and substitution effects
12. 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 work period and nothing in her retirement period. She must both save and consume in her work period, and can earn 10 per cent 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 15 per cent. Discuss the role of income and substitution effects in determining whether Janet will increase or decrease her savings in the work period.
DIF: Difficult TOP: How do interest rates affect household saving?
13. Use a diagram to demonstrate the circumstances under which a consumer is indifferent between an in-kind transfer and a cash transfer of equal dollar value. If a cash transfer is always at least as preferred as an in-kind transfer, what do you think are the reasons for maintaining programs that rely on in-kind transfers? Explain your answer.
DIF: Difficult TOP: Do the poor prefer to receive cash or in-kind transfers?