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Exam 22: The Theory of Consumer Choice

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Question 21

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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

E) B) and C)
F) A) and C)

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Question 22

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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

E) None of the above
F) A) and B)

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Question 23

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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.

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.

If a consumer wants less of a good when his income rises, it is an inferior good.

The substitution effect is the change in consumption that results when a price change moves the consumer along the same indifference curve.

Graph 22-1 -Refer to Graph 22-1. A consumer who chooses to spend all of her income will be at point(s) :

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).

Which of the following is a property of indifference curves?

When leisure is a normal good, the income effect from an increase in wages is manifest in a(n) :

Graph 22-3 -Refer to Graph 22-3. If the budget constraint is $160 then from the panel (b) we can determine that the:

An upward-sloping individual labour supply curve is indicative of:

A budget constraint:

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.

Graph 22-6 -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:

Graph 22-2 -Refer to Graph 22-2. Which of the graphs shown reflects a decrease in the price of good X only?

It is plausible for the labour supply curve to slope either upwards or downwards.

If demand for a good falls as income rises, this is known as a:

Graph 22-3 -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) ?

The amount of a good that an individual has: