Verified Test Bank Ch5 Using Consumer Choice Theory 107 - Microeconomics Theory and Applications 13th Edition | Test Bank with Answer Key by Edgar K. Browning, Mark A. Zupan. DOCX document preview.
Package: Test Bank
Title: Microeconomics: Theory and Application, 13e
Chapter Number: 5
Question Type: Multiple Choice
1. In an attempt to encourage the use of solar energy, the government pays a part of the price of solar panels to the producer and allows consumers to buy as many panels as they wish at the subsidized price. This is an example of a(n) _____.
a. excise subsidy
b. fixed-quantity subsidy
c. voucher program
d. lump-sum transfer
Learning Objective: Determine how an excise subsidy affects consumer welfare and why it results in a deadweight loss.
2. The U.S. government in effect subsidizes health care of workers by:
a. relaxing health care regulations.
b. having lower tax rates on wages and salaries.
c. not taxing health care benefits.
d. reducing taxes on firms and small businesses.
Learning Objective: Determine how an excise subsidy affects consumer welfare and why it results in a deadweight loss.
3. An excise subsidy given on each unit of X consumed will:
a. reduce consumption of X and lower total expenditures on X.
b. shift the budget line inward in a parallel manner.
c. place the consumer on a higher indifference curve.
d. cause the consumer to increase consumption of non-subsidized goods.
Learning Objective: Determine how an excise subsidy affects consumer welfare and why it results in a deadweight loss.
4. Which of the following is true of an excise subsidy?
a. An excise subsidy has both an income and a substitution effect which causes the consumption of the subsidized good to rise.
b. An excise subsidy has a substitution effect since the subsidy artificially lowers the price of the subsidized good causing the consumer to increase consumption of the good, but no income effect.
c. An excise subsidy increases consumption of a good by the same quantity as does a cash transfer but at a lower cost to the government.
d. An excise subsidy has an income effect since the subsidy increases the consumer’s income but no substitution effect.
Learning Objective: Determine how an excise subsidy affects consumer welfare and why it results in a deadweight loss.
5. If an equal-cost lump-sum transfer were substituted for a per unit excise subsidy on good X:
a. the consumption of X under the excise subsidy would be higher and the consumer would be on a higher indifference curve.
b. the consumption of X under the excise subsidy would be higher, but the consumer would be on the same indifference curve.
c. the consumption of X under the lump-sum transfer would be higher and the consumer would be on a higher indifference curve.
d. the consumption of X under the lump-sum transfer could be higher, but the cost of the transfer would be higher.
Learning Objective: Determine how an excise subsidy affects consumer welfare and why it results in a deadweight loss.
6. Which of the following is true of an excise subsidy?
a. An excise subsidy has a positive substitution effect but negative income effect on the consumption of the subsidized good.
b. An excise subsidy increases consumption of the subsidized good more than a cash transfer of equal-cost.
c. An excise subsidy leaves the well-being of the subsidy recipient unchanged.
d. An excise subsidy causes consumption of nonsubsidized goods to increase.
Learning Objective: Determine how an excise subsidy affects consumer welfare and why it results in a deadweight loss.
7. Compared to an equal-cost cash grant, an excise subsidy on clothing results in the purchase of:
a. more clothing and more of other goods.
b. less clothing and more of other goods.
c. more clothing and less of other goods.
d. less clothing and less of other goods.
Learning Objective: Determine how an excise subsidy affects consumer welfare and why it results in a deadweight loss.
8. Figure 5-1 shows the preferences of a consumer for food and other goods. He is initially in equilibrium at point A where the budget line MN is tangent to the indifference curve. In Figure 5-1, the total outlay on food before the excise subsidy is given by _____.
a. KC
b. 0G
c. 0H
d. 0J
Learning Objective: Determine how an excise subsidy affects consumer welfare and why it results in a deadweight loss.
9. Figure 5-1 shows the preferences of a consumer for food and other goods. He is initially in equilibrium at point A where the budget line MN is tangent to the indifference curve. In Figure 5-1, the total outlay on other goods before the excise subsidy is given by _____.
a. 0M
b. 0N
c. 0E
d. 0G
Learning Objective: Determine how an excise subsidy affects consumer welfare and why it results in a deadweight loss.
10. Figure 5-1 shows the preferences of a consumer for food and other goods. He is initially in equilibrium at point A where the budget line MN is tangent to the indifference curve. In Figure 5-1, the total cost incurred by the government on the lump-sum transfer is given by _____.
a. CE’
b. BF
c. CH
d. BJ
Learning Objective: Determine how an excise subsidy affects consumer welfare and why it results in a deadweight loss.
11. The effect of substituting an equal-cost lump-sum grant for an excise subsidy is to:
a. increase the consumption of the subsidized good and increase the consumption of other goods.
b. decrease the consumption of the subsidized good and increase the consumption of other goods.
c. decrease the consumption of the subsidized good and decrease the consumption of other goods.
d. increase the consumption of the subsidized good and decrease the consumption of other goods.
Learning Objective: Determine how an excise subsidy affects consumer welfare and why it results in a deadweight loss.
12. Comparing the original budget line with the budget line for an excise subsidy and a cash grant:
a. the budget line for a cash grant shifts such that it is tangent to the same indifference curve so that the well-being of the consumer is the same.
b. the slope of the budget line for a cash grant is positive.
c. the budget line for a cash grant is parallel to the original budget line.
d. the budget line for an excise subsidy shifts such that it is tangent to the same indifference curve so that the well-being of the consumer is the same.
Learning Objective: Determine how an excise subsidy affects consumer welfare and why it results in a deadweight loss.
13. Unlike an equivalent-sized cash transfer, an excise subsidy on good X:
a. has an income effect.
b. leaves the consumer better off.
c. has a substitution effect.
d. increases consumption of composite goods.
Learning Objective: Determine how an excise subsidy affects consumer welfare and why it results in a deadweight loss.
14. An excise subsidy given on clothing will encourage consumers to purchase:
a. more clothing due to the substitution effect.
b. less clothing due to the income effect.
c. more clothing and less of other goods.
d. less clothing since clothing is an inferior good.
Learning Objective: Determine how an excise subsidy affects consumer welfare and why it results in a deadweight loss.
15. Given a choice between an equal-cost cash grant and an excise subsidy, a consumer will:
a. prefer an excise subsidy.
b. prefer an excise subsidy if the good is a normal good.
c. be indifferent between an excise subsidy and a cash grant.
d. be worse off with an excise subsidy.
Learning Objective: Determine how an excise subsidy affects consumer welfare and why it results in a deadweight loss.
16. Which of the following is a consequence of subsidizing consumers using a per-unit excise subsidy for the purchase of some good or service as opposed to a lump-sum payment of an equal amount?
a. Consumers will not necessarily be better off according to their own preferences.
b. The deadweight loss from over-consumption of the good or service is avoided.
c. Consumers will move to a higher indifference curve.
d. Consumers’ purchase decisions will be based on their true valuation of the good.
Learning Objective: Determine how an excise subsidy affects consumer welfare and why it results in a deadweight loss.
17. Being a member of the government-sponsored MediSave scheme entitles employees to a lump-sum payment in cash towards medical expenses. This scheme would:
a. increase employment.
b. make workers better off.
c. not change workers’ welfare.
d. cause average wages to fall.
Learning Objective: Determine how an excise subsidy affects consumer welfare and why it results in a deadweight loss.
18. Figure 5-2 shows the quantity demanded of a good at various prices. Refer to Figure 5-2. The deadweight loss of an excise subsidy that lowers the price from P1 to P2 is area _____.
a. P1ACP2
b. P1BCP2
c. ADC
d. ABC
Learning Objective: Determine how an excise subsidy affects consumer welfare and why it results in a deadweight loss.
19. Figure 5-2 shows the quantity demanded of a good at various prices. Based on Figure 5-2, the welfare cost of an excise tax (that raises price from P2 to P1) is the area _____.
a. P1ACP2
b. P1BCP2
c. ADC
d. ABC
Learning Objective: Determine how an excise subsidy affects consumer welfare and why it results in a deadweight loss.
20. In which of the following cases can a subsidy possibly harm its recipients?
a. When consumption of the subsidized good is mandatory
b. When the subsidy is fully funded by the government
c. When the subsidy is targeted at low-income groups
d. When the good that is subsidized is a luxury good
Learning objective: Examine how the public provision of a certain quantity of a good such as education may lead to less consumption of the good.
21. A subsidy can actually cause the consumption of subsidized goods to fall if:
a. the consumer has concave indifference curves.
b. the government prohibits resale of the good.
c. the price of other goods also falls.
d. the subsidized quantity of the good is fixed.
Learning Objective: Analyze how a voucher program would affect the quantity of educational services chosen by parents for their children.
22. Figure 5-3 shows a family’s preferences for housing and other goods. Refer to Figure 5-3. Suppose the government offered public housing that provided exactly B0 units of housing services to a low-income family. The public housing unit:
a. is provided by the government at a cost of $TB.
b. allows the family to reach a higher indifference curve but causes the family to consume more housing than an equal-sized cash transfer.
c. increases the level of housing consumption by the same amount as an equal-sized cash transfer.
d. causes the family to consume less housing than before the fixed-quantity subsidy.
Learning Objective: Analyze how a voucher program would affect the quantity of educational services chosen by parents for their children.
23. Figure 5-4 shows a family’s preferences for public and private healthcare. Refer to Figure 5-4. Suppose the government offers a fixed quantity subsidy of healthcare valued at $B0. The new budget line becomes _____.
a. MAS
b. MATN
c. MN
d. AS
Learning Objective: Analyze how a voucher program would affect the quantity of educational services chosen by parents for their children.
24. Suppose the government provides $1,400 worth of educational services for all children. Assume that public schooling cannot be supplemented with private tutoring. What would be the cost of schooling for a family that desires educational services worth $1,700?
a. $0
b. $300
c. $1,700
d. Cannot be determined without more information
Learning Objective: Analyze how a voucher program would affect the quantity of educational services chosen by parents for their children.
25. Which of the following statements is true?
a. Consumers are better off with a fixed-quantity subsidy than an equal-cost voucher system.
b. Voucher systems will not increase the quantity consumed of the subsidized good.
c. With a fixed-quantity subsidy consumers will consume more of other goods.
d. Fixed-quantity subsidies and voucher systems can both place the consumer on a higher indifference curve.
Learning Objective: Analyze how a voucher program would affect the quantity of educational services chosen by parents for their children.
26. A family's preferences toward schooling, before and after a fixed-quantity subsidy, are shown in Figure 5-5. Prior to the subsidy, the family is in equilibrium at point J. Assume that public schooling cannot be supplemented with private tutoring. Refer to Figure 5-5. After the fixed-quantity subsidy has been introduced, the family consumes:
a. its optimum level of other goods.
b. less than its optimum quantity of schooling.
c. more than its optimum quantity of schooling.
d. less than its optimum quantity of other goods.
Learning Objective: Analyze how a voucher program would affect the quantity of educational services chosen by parents for their children.
27. A family's preferences toward schooling, before and after a fixed-quantity subsidy, are shown in Figure 5-5. Prior to the subsidy, the family is in equilibrium at point J. Assume that public schooling cannot be supplemented with private tutoring. Refer to Figure 5-5. The fixed-quantity subsidy reduces schooling by _____.
a. G0
b. B0
c. BG
d. H0
Learning Objective: Analyze how a voucher program would affect the quantity of educational services chosen by parents for their children.
28. A family's preferences toward schooling, before and after a fixed-quantity subsidy, are shown in Figure 5-5. Prior to the subsidy, the family is in equilibrium at point J. Assume that public schooling cannot be supplemented with private tutoring. Refer to Figure 5-5. Public schooling provided in the amount of B0 causes the family to increase consumption of other goods by _____.
a. MC
b. MH
c. M0
d. CH
Learning Objective: Analyze how a voucher program would affect the quantity of educational services chosen by parents for their children.
29. A family's preferences toward schooling, before and after a fixed-quantity subsidy, are shown in Figure 5-5. Prior to the subsidy, the family is in equilibrium at point J. Assume that public schooling cannot be supplemented with private tutoring. Refer to Figure 5-5. Public schooling provided in the amount of B0 causes the family to consume _____ of other goods.
a. MC
b. MH
c. M0
d. CH
Learning Objective: Analyze how a voucher program would affect the quantity of educational services chosen by parents for their children.
30. A family's preferences toward schooling, before and after a fixed-quantity subsidy, are shown in Figure 5-5. Prior to the subsidy, the family is in equilibrium at point J. Assume that public schooling cannot be supplemented with private tutoring. Refer to Figure 5-5. Suppose the government offers education vouchers of value $B0 instead of a fixed-quantity subsidy. The budget line will become _____.
a. MATN
b. AS
c. MN
d. MAS
Learning Objective: Analyze how a voucher program would affect the quantity of educational services chosen by parents for their children.
31. Assume an indifference map with other goods on the vertical axis and health on the horizontal axis. The government provides families with $400 vouchers that can be redeemed for healthcare services at any hospital, public or private. The budget line for a family that avails this voucher scheme will:
a. be negatively sloped.
b. be positively sloped up to $400 and then have a zero slope.
c. have a zero slope up to $400 and then have a negative slope.
d. be a straight line with an infinite slope.
Learning Objective: Analyze how a voucher program would affect the quantity of educational services chosen by parents for their children.
32. Suppose a local government decides to increase taxes on its residents and use that money to provide meals to each individual in the community. The scheme provides each individual with a small frozen dinner. Compared to a voucher system that allows individuals to purchase meals at a private restaurant, the frozen dinner scheme:
a. will decrease both quantity and quality of meals consumed.
b. will not affect the quality or quantity of meals.
c. will give individuals greater variety and choice of meals.
d. will increase both quantity and quality of meals consumed.
Learning Objective: Analyze how a voucher program would affect the quantity of educational services chosen by parents for their children.
33. Compared to a system of providing education free of cost at government schools, a voucher program that provides the means for parents to send their school-age children to private schools at government expense:
a. will allow families to consume a higher quantity and better quality of education.
b. will lower the quality of education provided.
c. will not affect the quantity and quality of education.
d. will result in a lower quantity of education consumed.
Learning Objective: Analyze how a voucher program would affect the quantity of educational services chosen by parents for their children.
34. All-you-can-eat restaurants charge a fixed price that permits unlimited access to prepared food. Suppose food consumption is on the horizontal axis and all other goods on the vertical axis. If the restaurant charges $10 per meal while the price of all other goods is $20, restaurant patrons will consume to a point on their indifference curve where their marginal rate of substitution of food for all other goods is equal to _____.
a. 2
b. 1/2
c. 10
d. 0
Learning Objective: Explore the impact of per-bag charges versus a fixed annual fee on the amount of trash generated by a community, recycling, and household welfare.
35. One of the possible explanations for why more trash is generated in cities is that _____.
a. cities have a low population density.
b. trash collection services in cities are expensive.
c. trash disposal is an inferior good
d. most city dwellers do not have to pay per unit of trash generated
Learning Objective: Explore the impact of per-bag charges versus a fixed annual fee on the amount of trash generated by a community, recycling, and household welfare.
36. An increase in the price per unit for trash disposal from zero to a positive quantity causes the budget line to change from:
a. a vertical line to a horizontal line.
b. having a zero slope to a negative slope.
c. having a negative slope to a positive slope.
d. a horizontal line to a vertical line.
Learning Objective: Explore the impact of per-bag charges versus a fixed annual fee on the amount of trash generated by a community, recycling, and household welfare.
37. Which of the following policies would work best towards reducing traffic jams?
a. Relaxation of government restrictions on the number of cars being produced and sold
b. A reduction in interest rates on car loans
c. The imposition of a marginal fee to use certain roads during peak traffic hours
d. A levy of a fixed annual payment by car owners as traffic congestion fees
Learning Objective: Explore the impact of per-bag charges versus a fixed annual fee on the amount of trash generated by a community, recycling, and household welfare.
38. Which of the following groups are better off under an annual fee system of garbage disposal?
a. Households that generate the average amount of trash
b. Households that generate less than the average amount of trash
c. All households that opt for the annual fee system
d. Households that generate more than the average amount of trash
Learning Objective: Explore the impact of per-bag charges versus a fixed annual fee on the amount of trash generated by a community, recycling, and household welfare.
39. An individual who is considering consumption between two time periods (year 1 and year 2) has an endowment of $20,000 in year 1 and $15,000 in year 2. If the interest rate is 5 percent, what is the maximum approximate amount that can be spent on consumption in year 1?
a. $35,000
b. $20,000
c. $35,750
d. $34,250
Learning Objective: Develop an intertemporal model that illuminates the consumer’s choice to save or borrow and shows how changes in the consumer’s endowment and the interest rate affect that choice.
40. Consider the income and consumption of an individual between two time periods. If consumption in period 2 (C2) is on the horizontal axis, consumption in period 1 (C1) is on the vertical axis, and the interest rate is 11 percent, the slope of the budget constraint must be _____.
a. 0.11
b. 0.9
c. 1.11
d. 11
Learning Objective: Develop an intertemporal model that illuminates the consumer’s choice to save or borrow and shows how changes in the consumer’s endowment and the interest rate affect that choice.
41. Other things remaining the same, in the intertemporal consumer choice model a change in the endowment point:
a. produces a parallel shift in the consumer’s budget line.
b. alters the relative cost of future and present consumption.
c. pivots the budget line.
d. reduces the cost of current consumption.
Learning Objective: Develop an intertemporal model that illuminates the consumer’s choice to save or borrow and shows how changes in the consumer’s endowment and the interest rate affect that choice.
42. A reduction in an individual’s future income will cause:
a. consumption to fall in both time periods because consumption in both years are normal goods.
b. a fall in consumption in the future period but not the current period since the price of future consumption relative to current consumption did not change.
c. consumption to fall in the future period and rise in the current period as the consumer substitutes more current consumption for the future consumption.
d. an increase in current consumption if interest rates are high enough to induce consumption.
Learning Objective: Develop an intertemporal model that illuminates the consumer’s choice to save or borrow and shows how changes in the consumer’s endowment and the interest rate affect that choice.
43. In a two-year period, suppose Gloria has $10,000 in income in year 1 and $4,300 in income in year 2. In order to maintain her optimal consumption of $8,000 in year 1 and $6,500 in year 2, she can borrow or lend at a rate of 10 percent. If Gloria's income stream changes such that she earns $3,000 in Year 1 and $12,000 in Year 2, the budget line will:
a. shift out away from the origin.
b. pivot about the endowment point.
c. pivot about the intercept on the axis representing year 2 income.
d. remain unchanged.
Learning Objective: Develop an intertemporal model that illuminates the consumer’s choice to save or borrow and shows how changes in the consumer’s endowment and the interest rate affect that choice.
44. Suppose consumption in year 2 (C2) is on the horizontal axis and consumption in year 1 (C1) is on the vertical axis. An increase in the interest rate:
a. makes borrowers better off and lenders worse off.
b. causes more people to shift their consumption from year 2 to year 1.
c. causes the budget line to rotate outward along the horizontal axis.
d. will reduce savings in year 2.
Learning Objective: Develop an intertemporal model that illuminates the consumer’s choice to save or borrow and shows how changes in the consumer’s endowment and the interest rate affect that choice.
45. In the intertemporal consumer choice model, an increase in _____ will alter the slope of the budget line.
a. saving
b. the interest rate
c. future income
d. borrowing
Learning Objective: Develop an intertemporal model that illuminates the consumer’s choice to save or borrow and shows how changes in the consumer’s endowment and the interest rate affect that choice.
46. An individual is considering consumption in two periods. He has decided to borrow $1,000 in period 1, given his endowment and the interest rate. Other things remaining the same, if the interest rate increases, he will:
a. borrow less than $1,000.
b. continue to borrow $1,000.
c. borrow more than $1,000.
d. borrow more or less depending upon whether or not the substitution effect of the change is greater than the income effect.
Learning Objective: Develop an intertemporal model that illuminates the consumer’s choice to save or borrow and shows how changes in the consumer’s endowment and the interest rate affect that choice.
47. Consider an individual for whom consumption in two periods is a normal good. Other things remaining the same, if the interest rate increases, then:
a. he is worse off.
b. he is better off.
c. he will spend more in each period.
d. he will choose to save more.
Learning Objective: Develop an intertemporal model that illuminates the consumer’s choice to save or borrow and shows how changes in the consumer’s endowment and the interest rate affect that choice.
48. Fred is considering consumption between two periods and is earning an income of $1,000 in both periods. If the interest rate is 8 percent, Fred borrows $500, but if the interest rate rises to 18 percent, Fred saves $500. Is this behavior economically reasonable?
a. No, Fred would borrow less because of the higher interest rate but would still borrow a positive amount.
b. No, Fred might not borrow at all, but would not start saving. If Fred wanted to save he would have saved at the lower interest rate too.
c. Yes, the change in interest rates will cause his endowment point to shift, allowing him to become a saver.
d. Yes, the higher interest rate will raise the cost of current consumption, inducing him to cut back current consumption. He could cut back so much that he becomes a saver.
Learning Objective: Develop an intertemporal model that illuminates the consumer’s choice to save or borrow and shows how changes in the consumer’s endowment and the interest rate affect that choice.
49. In a two-year period, if a higher interest rate causes consumption in year 1 to rise:
a. the income effect associated with the higher interest rate is greater than the substitution effect.
b. the substitution effect associated with the higher interest rate is greater than the income effect.
c. the income effect of the higher interest rate is negative.
d. the substitution effect of the higher interest rate is positive.
Learning Objective: Develop an intertemporal model that illuminates the consumer’s choice to save or borrow and shows how changes in the consumer’s endowment and the interest rate affect that choice.
50. When comparing T-bills and stocks, a risk-averse investor may choose to invest in T-bills although stocks give higher average returns because _____.
a. investing in stocks involves a long term commitment
b. investing in stocks involves a higher degree of risk
c. stocks are less liquid than T-bills
d. stocks cannot be bought and sold in a secondary market
Learning Objective: Understand how the theory of consumer choice can explain what types of financial assets an individual intent on saving for the future should invest in, or purchase.
51. Brenda starts a business for $150,000 that gives her a 50% chance of losing and a 50% chance of gaining an expected annual return of $75,000. John is content with a job that pays him $75,000 per year with near certainty; there is only about a 1% chance of losing his job each year. Suppose risk is on the horizontal axis and return on the vertical axis, Brenda’s indifference curve for risk and return:
a. is flatter than John’s.
b. is steeper than John’s.
c. has the same slope as John’s.
d. is horizontal.
Learning Objective: Understand how the theory of consumer choice can explain what types of financial assets an individual intent on saving for the future should invest in, or purchase.
52. Suppose Microsoft stock will provide either a return of 10 or 20 percent over the next year and that the probability of the former outcome is 0.25 while the probability of the latter is 0.75. The expected return on Microsoft stock over the next year is thus _____%.
a. 15
b. 12.5
c. 17.5
d. 20
Learning Objective: Understand how the theory of consumer choice can explain what types of financial assets an individual intent on saving for the future should invest in, or purchase.
53. Suppose Microsoft stock will provide either a return of 10 or 20 percent over the next year and that the probability of the former outcome is 0.25 while the probability of the latter is 0.75. If the utility an investor derives from a 10 percent return on Microsoft stock is 200 and the utility the investor derives from a 20 percent return is 400, the investor's expected utility from holding Microsoft stock is _____.
a. 300
b. 350
c. 250
d. 400
Learning Objective: Understand how the theory of consumer choice can explain what types of financial assets an individual intent on saving for the future should invest in, or purchase.
54. Expected return is defined as _____.
a. the summed value of each possible rate of return discounted for inflation
b. the average probability of profit on a fair investment
c. the expected probability of high returns on an investment
d. the summed value of each possible rate of return weighted by its probability
Learning Objective: Understand how the theory of consumer choice can explain what types of financial assets an individual intent on saving for the future should invest in, or purchase.
55. The expected utility from an investment is defined as _____.
a. the summed value of each possible utility weighted by its probability
b. the expected returns from an investment weighted by its risk.
c. the expected probability of high returns on an investment
d. the summed value of each possible rate of return discounted for inflation
Learning Objective: Understand how the theory of consumer choice can explain what types of financial assets an individual intent on saving for the future should invest in, or purchase.
56. For a risk-averse individual, with return on the X-axis and total utility on the Y-axis, the slope of the total utility curve:
a. increases at an increasing rate.
b. has a constant slope.
c. increases at a decreasing rate.
d. is always negative.
Learning Objective: Understand how the theory of consumer choice can explain what types of financial assets an individual intent on saving for the future should invest in, or purchase.
57. For a risk-loving individual, with return on the X-axis and total utility on the Y-axis, the slope of the total utility curve:
a. increases at an increasing rate.
b. has a constant slope.
c. increases at a decreasing rate.
d. decreases at an increasing rate.
Learning Objective: Understand how the theory of consumer choice can explain what types of financial assets an individual intent on saving for the future should invest in, or purchase.
58. For a risk-neutral individual, with return on the X-axis and total utility on the Y-axis, slope of the total utility curve:
a. increases at an increasing rate.
b. has a constant slope.
c. increases at a decreasing rate.
d. decreases at an increasing rate.
Learning Objective: Understand how the theory of consumer choice can explain what types of financial assets an individual intent on saving for the future should invest in, or purchase.
59. A risk-averse individual _____.
a. prefers a sure return to an uncertain prospect generating the same expected return
b. is indifferent between a sure return and an uncertain prospect generating the same expected return
c. will forgo a sure return in favor of an uncertain prospect generating the same expected return
d. will avoid all risky investments no matter what the return
Learning Objective: Understand how the theory of consumer choice can explain what types of financial assets an individual intent on saving for the future should invest in, or purchase.
60. A risk-neutral individual _____.
a. prefers a sure return to an uncertain prospect generating the same expected return
b. is indifferent between a sure return and an uncertain prospect generating the same expected return
c. will forgo a sure return in favor of an uncertain prospect generating the same expected return
d. will avoid all risky investments no matter what the return
Learning Objective: Understand how the theory of consumer choice can explain what types of financial assets an individual intent on saving for the future should invest in, or purchase.
61. A risk-averse individual who owns a $200,000 house and faces the prospect that the house will burn down with the probability 0.05 in any given year will be willing to pay how much of an annual premium to fully insure against such a loss?
a. $5,000
b. More than $10,000
c. No more than $5,000
d. Either more or less than $10,000 depending on whether housing is a normal or inferior good for the individual
Learning Objective: Understand how the theory of consumer choice can explain what types of financial assets an individual intent on saving for the future should invest in, or purchase.
62. Which of the following leads to the diversification of risk?
a. Investing in assets that give the highest possible returns
b. Investing in safe assets that may give low returns
c. Investing in multiple assets rather than a single asset
d. Investing in assets that are highly risky but give high returns
Learning Objective: Understand how the theory of consumer choice can explain what types of financial assets an individual intent on saving for the future should invest in, or purchase.
63. Walter works for a large firm that produces software and has a capitalized value of $10 billion. This firm pays its employees, in part, with the company’s stock, compensating Walter an additional thirty percent of his $50,000 annual salary worth of the company’s stock. Which of the following is true?
a. This compensation scheme reduces the level of risk in his portfolio since he is employed at the same company.
b. This compensation scheme provides Walter a good means of minimizing financial risk since he can hold stock in his company rather than money in the bank.
c. To reduce his exposure to risk Walter should purchase more stock in his company if he believes more people will buy computers in the future.
d. To minimize risk Walter should sell the stock in his company and buy other assets to diversify his financial holdings.
Learning Objective: Understand how the theory of consumer choice can explain what types of financial assets an individual intent on saving for the future should invest in, or purchase.
64. Consider Figure 5-6. The family shown faces the budget line A1BFZ. Health insurance is measured in $100 units and other goods in $1 units. A health insurance plan is introduced which would provide this family $15,000 worth of insurance for $4,000. The new budget constraint the family will face is:
Other Goods
Health Insurance
$50,000 = A1
$46,000 = A2
$35,000 = A3
B
A’
F
0
Z
Z’
H1
H2
(40)
(150)
Figure 5-6
$61,000 = A
a. AA’Z’
b. AA1BA’Z’
c. A1BA’Z’
d. A1A2BA’Z’
Learning objective: Examine how the public provision of a certain quantity of a good such as education may lead to less consumption of the good.
Question Type: True/False
65. An excise subsidy is a form of subsidy in which the government pays part of the per-unit price of a good and allows consumers to purchase as many units as desired at the subsidized price.
Learning Objective: Determine how an excise subsidy affects consumer welfare and why it results in a deadweight loss.
66. A lump-sum transfer is a form of subsidy in which the government gives the consumer a cash grant to be spent on specific goods or services.
Learning Objective: Determine how an excise subsidy affects consumer welfare and why it results in a deadweight loss.
67. An excise subsidy is a lump-sum transfer because it is linked to the consumption of a specific good.
Learning Objective: Determine how an excise subsidy affects consumer welfare and why it results in a deadweight loss.
68. A consumer will be better off if given a cash grant instead of an excise subsidy linked to the consumption of a particular good.
Learning Objective: Determine how an excise subsidy affects consumer welfare and why it results in a deadweight loss.
69. Deadweight loss is also called welfare loss.
Learning Objective: Determine how an excise subsidy affects consumer welfare and why it results in a deadweight loss.
70. A deadweight loss is a measure of the aggregate loss in well-being of sellers in a market resulting from output not being at the efficient level.
Learning Objective: Determine how an excise subsidy affects consumer welfare and why it results in a deadweight loss.
71. U.S. consumers are fairly insensitive to the nature of their insurance coverage and the extent to which they have “skin in the game” and pay for a portion of their health care expenses out of pocket.
Learning Objective: Determine how an excise subsidy affects consumer welfare and why it results in a deadweight loss.
72. Subsidies cannot harm the recipients of the subsidies, at least in the case where they do not have to pay taxes to finance the subsidies.
Learning Objective: Examine how the public provision of a certain quantity of a good such as education may lead to less consumption of the good.
73. A voucher program is a form of subsidy in which parents receive vouchers that can be used to purchase education at select school where they choose from an approved list.
Learning Objective: Public Schools and the Voucher Proposal
74. Everyone benefits when switching from a fixed annual fee for garbage pickup to a per-bag pricing system.
Learning Objective: Paying for Garbage
75. The endowment point is the consumption mix available to the individual if no saving or borrowing takes place.
Learning Objective: The Consumer’s Choice to Save or Borrow
76. A reduction in future income will alter the relative cost of future and present consumption.
Learning Objective: The Consumer’s Choice to Save or Borrow
77. Expected return is the summed value of each possible rate of return weighted by its interest rate.
Learning Objective: Investor Choice
78. Expected utility is the summed value of each possible utility weighted by its probability.
Learning Objective: Investor Choice
Question Type: Essay
79. Show and explain why substituting an unrestricted cash transfer for an excise subsidy of equal cost to the government must lead to less consumption of the subsidized good and more consumption of other goods.
Learning Objective: Determine how an excise subsidy affects consumer welfare and why it results in a deadweight loss.
80. The government of Lilliput wants to ensure food security for all its citizens. Explain how each of these policies will affect the consumption of food and other goods using indifference curves.
a) Providing each Lilliputian with a food voucher for $50
b) Transferring $50 in cash to each Lilliputian's bank account
c) Subsidizing the price of food with a per-unit subsidy
d) Providing $50 worth of food per head free of cost at government-run food agencies. (Assume that an individual cannot supplement this quantity with any extra food)
Learning Objective: Explore the impact of per-bag charges versus a fixed annual fee on the amount of trash generated by a community, recycling, and household welfare.
82. Fun-day, a theme park, recently changed its ticket pricing plan from Plan 1 to Plan 2. How would you explain the sudden increase in the number of people at the theme park?
Plan 1 | Plan 2 | |||
Children | Adults | Children | Adults | |
Fixed admission fee | 0 | 0 | $20 | $40 |
Per-ride fee | $2 | $5 | 0 | 0 |
Learning Objective: Explore the impact of per-bag charges versus a fixed annual fee on the amount of trash generated by a community, recycling, and household welfare.
83. Answer the following:
a) Doug is 51 years old. He owns a Laundromat and plans to retire at the age of 60. Pete is 21 years old. He just started working at an investment bank. The figure shows the preferences for future and present consumption for an individual. Other things unchanged, who is more likely to be at point N on the budget line and why?
b) The government passes a new regulation on bank bonuses; the tax rate on bonuses has been hiked to 55%. How would this affect Pete, whose annual bonus forms a substantial portion of his compensation?
Learning Objective: Develop an intertemporal model that illuminates the consumer’s choice to save or borrow and shows how changes in the consumer’s endowment and the interest rate affect that choice.
84. In the model of inter-temporal choice, will a person who initially consumes exactly their income in each period have more or less current consumption after a decrease in the interest rate?
Learning Objective: Understand how the theory of consumer choice can explain what types of financial assets an individual intent on saving for the future should invest in, or purchase.
85. Phil and Jane, and their son Dylan, have $10,000 in savings which they would like to invest. Phil wants to use the money to open a diner although he has only a 30% chance of getting the same returns as Jane who prefers investing the money in Treasury bills. Jane prefers to invest in T-bills since they are less risky. Their son, Dylan, is indifferent between the diner and Treasury bills as long as he gets a new car. How would you represent their preferences towards risk and return on an indifference map?
Learning Objective: Understand how the theory of consumer choice can explain what types of financial assets an individual intent on saving for the future should invest in, or purchase.
86. Describe the relationship among total utility, marginal utility, and preferences toward risk.
Learning Objective: Understand how the theory of consumer choice can explain what types of financial assets an individual intent on saving for the future should invest in, or purchase.
87. Answer the following:
a) How is insurance similar to an individual’s diversified portfolio?
b) Explain why holding a diverse portfolio of assets is important to minimizing the risk of an investment portfolio.
c) Given the importance of diversifying all of your financial assets, is it a good idea to own stock in the company for which you work, even if you own stock in other sectors? Explain why or why not.
d) A home is the most valuable asset for a majority of U.S. residents. Why do we not see more diversification in real estate ownership against loss of value due to market fluctuations?
Learning Objective: Understand how the theory of consumer choice can explain what types of financial assets an individual intent on saving for the future should invest in, or purchase.
Document Information
Connected Book
Microeconomics Theory and Applications 13th Edition | Test Bank with Answer Key
By Edgar K. Browning, Mark A. Zupan