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Exam 22: The Theory of Consumer Choice

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Question 61

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A consumer who doesn't spend all of her income:

A) would be at a point inside her budget constraint
B) would not be consuming positive quantities of all goods
C) must be consuming at a point where her budget constraint touches one of the axes
D) would be at a point outside of her budget constraint

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

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Question 62

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Using the graph shown, construct a demand curve for M&Ms, given an income of $10.

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Question 63

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When two goods are perfect complements, the indifference curves are:

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:

Which of the following is a property of indifference curves?

The highest indifference curve that a consumer can reach is:

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.

The slope of a budget constraint is equal to the relative prices of the two goods.

Graph 22-3 -Refer to Graph 22-3. Suppose that these budget lines exist for the same consumer who faced the same budget constraint in both panels. What can we infer about the prices of the two goods?

Graph 22-7 -Refer to Graph 22-7. Assume that the consumer depicted in the graph has an income of $10. The price of Skittles is $1 and the price of M&Ms is $2. This consumer will choose a consumption bundle where the marginal rate of substitution is:

The backward bending portion of an individual labour supply curve is indicative of:

A consumer always prefers to be on a higher indifference curve to a lower indifference curve.

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) :

Draw indifference curves that reflect the following preferences. For each one, determine whether it satisfies all of the standard properties of indifference curves. a. pencils with white erasers and pencils with pink erasers b. left shoes and right shoes c. potatoes and rice d. income and polluted water

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) ?

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.

Which measure of elasticity can be weakly linked to Giffen goods?

Graphically demonstrate the conditions associated with a consumer optimum. Carefully label all curves and axes.

Graph 22-9 -Refer to Graph 22-9. Assume that the consumer depicted in the graph has an income of $50. 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 $5?

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.