Question 1

Which of the following descriptions best depicts the substitution effect?

Accepted Answer

A)   the change in consumption resulting from a change in the consumer's income, holding the prices of the goods constant
B)   the change in consumption resulting from a change in the consumer's income, holding the consumer's level of satisfaction constant
C)   the change in consumption resulting from a change in the price of one good, holding the consumer's level of satisfaction constant
D)   the change in consumption resulting from a change in the price of one good, allowing the consumer's level of satisfaction to changeE) A) and B)
F) A) and C)

Question 2

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?

Accepted Answer

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.E) B) and C)
F) None of the above

Question 3

Jack and Diane each buy pizza and paperback novels. Pizza costs $3 per slice, and paperback novels cost $5 each. Jack has a budget of $30, and Diane has a budget of $15 to spend on pizza and paperback novels. Which consumer(s)  can afford to purchase 5 slices of pizza and 3 paperback novels?

Accepted Answer

A)   Jack only
B)   Diane only
C)   both Jack and Diane
D)   neither Jack nor DianeE) All of the above
F) A) and D)

Question 4

For Antonio, the income effect of an interest-rate increase is stronger than the substitution effect. In response to a higher interest rate, will Antonio save more or will he save less?

Accepted Answer

In response to a hig...

Question 5

Figure 21-3
In each case, the budget constraint moves from BC-1 to BC-2.
 
-Refer to Figure 21-3. Which of the graphs in the figure reflects an increase in the price of good X only?

Accepted Answer

A)   graph a
B)   graph b
C)   graph c
D)   graph dE) A) and B)
F) B) and D)

Question 6

Suppose a consumer spends her income on two goods: music CDs and DVDs. The consumer has $200 to allocate to these two goods, the price of a CD is $10, and the price of a DVD is $20. What is the maximum number of DVDs the consumer can purchase?

Accepted Answer

A)   10
B)   20
C)   40
D)   50E) B) and D)
F) B) and C)

Question 7

Figure 21-2
The downward­sloping line on the figure represents a consumer's budget constraint. 
-Refer to Figure 21-2. Which points are affordable?

Accepted Answer

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

Question 8

As more units of an item are purchased, everything else equal, marginal satisfaction from consuming additional units will tend to

Accepted Answer

A)   decrease at the same rate for all consumers.
B)   decrease but at different rates for different people.
C)   increase at the same rate for all consumers.
D)   increase but at a decreasing rate for all consumers.E) None of the above
F) B) and D)

Question 9

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

Accepted Answer

A) True 
 B)False

Question 10

The following diagram shows two budget lines: A and B.  Which of the following could explain the change in the budget line from A to B?

Accepted Answer

A)   a simultaneous decrease in the price of X and the price of Y
B)   an increase in income
C)   a decrease in income and a decrease in the price of Y
D)   Both a and b are correct.E) A) and D)
F) B) and C)

Question 11

Utility measures the

Accepted Answer

A)   income a consumer receives from consuming a bundle of goods.
B)   satisfaction a consumer receives from consuming a bundle of goods.
C)   satisfaction a consumer places on her budget constraint.
D)   All of the above are correct.E) All of the above
F) None of the above

Question 12

Figure 21-5
(a)  (b) 
  
-Refer to Figure 21-5. In graph (b) , what is the price of good Y relative to the price of good X (i.e., PY/PX) ?

Accepted Answer

A)   1
B)   1/3
C)   3
D)   10E) B) and C)
F) B) and D)

Question 13

The slope of the budget constraint is all of the following except

Accepted Answer

A)   the relative price of two goods.
B)   the rate at which a consumer can afford to trade one good for another.
C)   the marginal rate of substitution.
D)   constant.E) B) and C)
F) All of the above

Question 14

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

Accepted Answer

A) True 
 B)False

Question 15

Calvin 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 savings will cause him to

Accepted Answer

A)   increase his savings rate.
B)   decrease his savings rate.
C)   continue saving at the same rate.
D)   Any of the above are possible.E) None of the above
F) C) and D)

Question 16

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

Accepted Answer

A) True 
 B)False

Question 17

If John's marginal utility derived from the consumption of another candy bar is 1 and the price of the candy bar is $1.50, then

Accepted Answer

A)   this is the last candy bar John will purchase since the marginal utility is less than the price.
B)   the opportunity cost of the candy bar is less than $1.50.
C)   if John purchases and consumes the candy bar his total satisfaction will go down because the marginal utility is less than the price.
D)   there is not enough information to determine if John will or will not purchase the candy bar.E) C) and D)
F) A) and D)

Question 18

Suppose Reta is planning for retirement in a two-period world. In the first period Reta is young and earns $1 million, and in the second period Reta is old and retired and earns nothing. The interest rate is initially 10 percent, but then it falls to 7 percent. After the interest rate falls, the

Accepted Answer

A)   substitution effect will induce Reta to consume more when she is young.
B)   substitution effect will induce Reta to consume less when she is young.
C)   income effect will induce Reta to consume more when she is young.
D)   change in interest rates affects the substitution effect but not the income effect.E) A) and D)
F) B) and D)

Question 19

A consumer chooses an optimal consumption point where the

Accepted Answer

A)   marginal rate of substitution equals the relative price ratio.
B)   slope of the indifference curve equals the slope of the budget constraint.
C)   ratio of the marginal utilities equals the ratio of the prices.
D)   All of the above are correct.E) All of the above
F) B) and D)

Question 20

When Adam's income increases, he purchases more tickets to Broadway musicals than he did before his income increased. For Adam, Broadway musicals are a(n)

Accepted Answer

A)   normal good.
B)   inferior good that is not a Giffen good.
C)   Giffen good.
D)   optimal good.E) A) and B)
F) B) and D)

Exam 21: The Theory of Consumer Choice

Figure 21-5 (a) (b) -Refer to Figure 21-5. In graph (b) , what is the price of good Y relative to the price of good X (i.e., PY/PX) ?

Correct AnswerverifiedShow Answer

Which of the following descriptions best depicts the substitution effect?

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

Suppose Reta is planning for retirement in a two-period world. In the first period Reta is young and earns $1 million, and in the second period Reta is old and retired and earns nothing. The interest rate is initially 10 percent, but then it falls to 7 percent. After the interest rate falls, the

Correct AnswerverifiedShow Answer

Figure 21-3 In each case, the budget constraint moves from BC-1 to BC-2. -Refer to Figure 21-3. Which of the graphs in the figure reflects an increase in the price of good X only?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

As more units of an item are purchased, everything else equal, marginal satisfaction from consuming additional units will tend to

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Figure 21-2 The downward­sloping line on the figure represents a consumer's budget constraint. -Refer to Figure 21-2. Which points are affordable?

Correct AnswerverifiedShow Answer

Calvin 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 savings will cause him to

Correct AnswerverifiedShow Answer

The following diagram shows two budget lines: A and B. Which of the following could explain the change in the budget line from A to B?

Correct AnswerverifiedShow Answer

Suppose a consumer spends her income on two goods: music CDs and DVDs. The consumer has $200 to allocate to these two goods, the price of a CD is $10, and the price of a DVD is $20. What is the maximum number of DVDs the consumer can purchase?

Correct AnswerverifiedShow Answer

A consumer chooses an optimal consumption point where the

Correct AnswerverifiedShow Answer

When Adam's income increases, he purchases more tickets to Broadway musicals than he did before his income increased. For Adam, Broadway musicals are a(n)

Correct AnswerverifiedShow Answer

The slope of the budget constraint is all of the following except

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

If John's marginal utility derived from the consumption of another candy bar is 1 and the price of the candy bar is $1.50, then

Correct AnswerverifiedShow Answer

Jack and Diane each buy pizza and paperback novels. Pizza costs $3 per slice, and paperback novels cost $5 each. Jack has a budget of $30, and Diane has a budget of $15 to spend on pizza and paperback novels. Which consumer(s) can afford to purchase 5 slices of pizza and 3 paperback novels?

Correct AnswerverifiedShow Answer

For Antonio, the income effect of an interest-rate increase is stronger than the substitution effect. In response to a higher interest rate, will Antonio save more or will he save less?

Correct AnswerverifiedIn response to a hig...View AnswerShow Answer

Utility measures the

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Figure 21-2 The downwardsloping line on the figure represents a consumer's budget constraint. -Refer to Figure 21-2. Which points are affordable?

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
In response to a hig...
View Answer

Correct Answer
verified