Question 1

Suppose at the consumer's current consumption bundle the marginal rate of substitution of cheese for wine is 1/2 bottle of wine per pound of cheese. The price of one pound of cheese is $6, and the price of a bottle of wine is $10. The consumer should increase his consumption of

Accepted Answer

A)  cheese, decrease his consumption of wine, and move to a lower indifference curve.
B)  cheese, decrease his consumption of wine, and move to a higher indifference curve.
C)  wine, decrease consumption of cheese, and move to a higher indifference curve.
D)  cheese, decrease consumption of wine, and remain on the same indifference curve.E) All of the above
F) A) and B)

Question 2

A consumer is currently spending all of her available income on two goods: music CDs and DVDs. At her current consumption bundle, she is spending twice as much on CDs as she is on DVDs. If the consumer has $120 of income and is consuming 10 CDs and 2 DVDs, what is the price of a DVD?

Accepted Answer

A)  $4
B)  $8
C)  $12
D)  $20E) C) and D)
F) A) and D)

Question 3

A Giffen good is one for which the quantity demanded rises as the price rises because the income effect

Accepted Answer

A)  reinforces the substitution effect.
B)  reinforces and is greater than the substitution effect.
C)  counteracts but is smaller than the substitution effect.
D)  counteracts and is greater than the substitution effect.E) B) and C)
F) A) and B)

Question 4

Giffen goods have positively-sloped demand curves because they are

Accepted Answer

A)  inferior goods with no substitution effect.
B)  normal goods with no substitution effect.
C)  inferior goods for which the substitution effect outweighs the income effect.
D)  inferior goods for which the income effect outweighs the substitution effect.E) None of the above
F) A) and B)

Question 5

When Ryan has an income of $2,000, he consumes 30 units of good A and 50 units of good B. After Ryan's income decreases to $1,500, he consumes 23 units of good A and 55 units of good B. Which of the following statements is correct?

Accepted Answer

A)  Both goods A and B are normal goods.
B)  Both goods A and B are inferior goods.
C)  Good A is a normal good, and good B is an inferior good.
D)  Good A is an inferior good, and good B is a normal good.E) A) and B)
F) A) and C)

Question 6

Figure 21-4
In each case, the budget constraint moves from BC-1 to BC-2.    
-Refer to Figure 21-4. Which of the graphs in the figure could reflect a simultaneous increase in the price of good X and decrease in the price of good Y?

Accepted Answer

A)  graph a
B)  graph b
C)  graph c
D)  graph dE) B) and D)
F) None of the above

Question 7

Consider the indifference curve map and budget constraint for two goods, beef and potatoes. Suppose the good measured on the horizontal axis, potatoes, is a Giffen good. Beef is measured on the vertical axis and is a normal good. When the price of potatoes increases, the substitution effect causes

Accepted Answer

A)  an increase in the consumption of potatoes, and the income effect causes a decrease in the consumption of potatoes. The substitution effect is less than the income effect.
B)  a decrease in the consumption of potatoes, and the income effect causes an increase in the consumption of potatoes. The substitution effect is greater than the income effect.
C)  an increase in the consumption of potatoes, and the income effect causes a decrease in the consumption of potatoes. The substitution effect is greater than the income effect.
D)  a decrease in the consumption of potatoes, and the income effect causes an increase in the consumption of potatoes. The substitution effect is less than the income effect.E) B) and C)
F) A) and B)

Question 8

All points on a demand curve are optimal consumption points.

Accepted Answer

A) True 
 B)False

Question 9

If we observe that William's budget constraint has moved inward, then we know for certain that

Accepted Answer

A)  his income must have decreased.
B)  he will be indifferent between goods X and Y.
C)  the price of one or both of the goods must have increased.
D)  his utility will decrease.E) None of the above
F) A) and D)

Question 10

Jordan 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 income effect dominates the substitution effect, an increase in the interest rate on savings will cause him to

Accepted Answer

A)  decrease his savings rate.
B)  increase his savings rate.
C)  continue saving at the current rate.
D)  Any of the above could be correct.E) A) and C)
F) A) and B)

Question 11

Figure 21-24 The figure shows three indifference curves and a budget constraint for a certain consumer named Steve. 
-Refer to Figure 21-24. In moving from point A to point C, Steve gives up

Accepted Answer

A)  4.9 pounds of apples, gains 2.0 pounds of pears, and becomes worse off.
B)  4.9 pounds of apples, gains 2.0 pounds of pears, and becomes better off.
C)  5.5 pounds of apples, gains 4.1 pounds of pears, and becomes worse off.
D)  5.5 pounds of apples, gains 4.1 pounds of pears, and becomes better off.E) B) and C)
F) B) and D)

Question 12

Suppose that for Emily, DVDs and trips to the movie theater are perfect substitutes. Currently, Emily is spending all of her income on trips to the movie theater. If the price of DVDs doubles, the substitution effect will

Accepted Answer

A)  be two times the income effect.
B)  be half the income effect.
C)  be zero.
D)  always increase the number of trips to the movie theater Emily makes.E) A) and B)
F) B) and D)

Question 13

Figure 21-22 
-Refer to Figure 21-22. If the consumer is currently at point A in the figure, a movement to point B as a result of a decrease in the price of potato chips represents the

Accepted Answer

A)  substitution effect.
B)  income effect.
C)  budget effect.
D)  price effect.E) A) and B)
F) A) and C)

Question 14

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

Accepted Answer

In response to a hig...

Question 15

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

Accepted Answer

A) True 
 B)False

Question 16

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

Accepted Answer

A) True 
 B)False

Question 17

If an increase in the interest rate lowers savings, then

Accepted Answer

A)  the substitution effect is greater than the income effect.
B)  the income effect is greater than the substitution effect.
C)  the income effect and the substitution effect move in the same direction.
D)  we are unable to determine the sizes of the income and substitution effects without more information.E) A) and C)
F) All of the above

Question 18

Energy drinks and granola bars are normal goods. When the price of energy drinks decreases, the income effect causes a

Accepted Answer

A)  shift to a lower indifference curve, and the consumer buys fewer granola bars.
B)  shift to a higher indifference curve, and the consumer buys more granola bars.
C)  movement along the indifference curve, and the consumer buys fewer granola bars.
D)  movement along the indifference curve, and the consumer buys more granola bars.E) None of the above
F) A) and C)

Question 19

Suppose a consumer is currently spending all of her available income on two goods: music CDs and DVDs. If the price of a CD is $9, the price of a DVD is $18, and she is currently consuming 10 CDs and 5 DVDs, what is the consumer's income?

Accepted Answer

A)  $90
B)  $180
C)  $270
D)  $360E) All of the above
F) None of the above

Question 20

A consumer has preferences over consumption and leisure, both of which are normal goods. When the wage decreases, the consumer chooses to consume less leisure. For this consumer the labor supply curve will

Accepted Answer

A)  slope upward.
B)  slope backward.
C)  be horizontal.
D)  be vertical.E) A) and D)
F) C) and D)

Exam 21: The Theory of Consumer Choice

When Ryan has an income of $2,000, he consumes 30 units of good A and 50 units of good B. After Ryan's income decreases to $1,500, he consumes 23 units of good A and 55 units of good B. Which of the following statements is correct?

Correct AnswerverifiedShow Answer

A consumer is currently spending all of her available income on two goods: music CDs and DVDs. At her current consumption bundle, she is spending twice as much on CDs as she is on DVDs. If the consumer has $120 of income and is consuming 10 CDs and 2 DVDs, what is the price of a DVD?

Correct AnswerverifiedShow Answer

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

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

A consumer has preferences over consumption and leisure, both of which are normal goods. When the wage decreases, the consumer chooses to consume less leisure. For this consumer the labor supply curve will

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

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All points on a demand curve are optimal consumption points.

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A Giffen good is one for which the quantity demanded rises as the price rises because the income effect

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Figure 21-4 In each case, the budget constraint moves from BC-1 to BC-2. -Refer to Figure 21-4. Which of the graphs in the figure could reflect a simultaneous increase in the price of good X and decrease in the price of good Y?

Correct AnswerverifiedShow Answer

Energy drinks and granola bars are normal goods. When the price of energy drinks decreases, the income effect causes a

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Figure 21-22 -Refer to Figure 21-22. If the consumer is currently at point A in the figure, a movement to point B as a result of a decrease in the price of potato chips represents the

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If we observe that William's budget constraint has moved inward, then we know for certain that

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Giffen goods have positively-sloped demand curves because they are

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If an increase in the interest rate lowers savings, then

Correct AnswerverifiedShow Answer

Suppose at the consumer's current consumption bundle the marginal rate of substitution of cheese for wine is 1/2 bottle of wine per pound of cheese. The price of one pound of cheese is $6, and the price of a bottle of wine is $10. The consumer should increase his consumption of

Correct AnswerverifiedShow Answer

Suppose a consumer is currently spending all of her available income on two goods: music CDs and DVDs. If the price of a CD is $9, the price of a DVD is $18, and she is currently consuming 10 CDs and 5 DVDs, what is the consumer's income?

Correct AnswerverifiedShow Answer

Jordan 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 income effect dominates the substitution effect, an increase in the interest rate on savings will cause him to

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Figure 21-24 The figure shows three indifference curves and a budget constraint for a certain consumer named Steve. -Refer to Figure 21-24. In moving from point A to point C, Steve gives up

Correct AnswerverifiedShow Answer

Suppose that for Emily, DVDs and trips to the movie theater are perfect substitutes. Currently, Emily is spending all of her income on trips to the movie theater. If the price of DVDs doubles, the substitution effect will

Correct AnswerverifiedShow Answer

Consider the indifference curve map and budget constraint for two goods, beef and potatoes. Suppose the good measured on the horizontal axis, potatoes, is a Giffen good. Beef is measured on the vertical axis and is a normal good. When the price of potatoes increases, the substitution effect causes

Correct AnswerverifiedShow Answer

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In response to a hig...
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