Question 1

The absolute value of the slope of the budget constraint is equal to

Accepted Answer

A)  the marginal rate of substitution between the two goods in question. 
B)  the price of good on the vertical axis divided by the price of the good on the horizontal axis. 
C)  the price of good on the horizontal axis divided by the price of the good on the vertical axis. 
D)  the quantity of the good on the vertical axis divided by the quantity of the good on the horizontal axis. 
A)  the marginal rate of substitution between the two goods in question. 
B)  the price of good on the vertical axis divided by the price of the good on the horizontal axis. 
C)  the price of good on the horizontal axis divided by the price of the good on the vertical axis. 
D)  the quantity of the good on the vertical axis divided by the quantity of the good on the horizontal axis.

Question 2

What happens to the absolute value of the marginal rate of substitution as you move down a convex (bowed toward the origin) indifference curve?

Accepted Answer

A)  It increases. 
B)  It decreases. 
C)  It remains constant. 
D)  It could increase or decrease. 
A)  It increases. 
B)  It decreases. 
C)  It remains constant. 
D)  It could increase or decrease.

Question 3

Figure 10-10  
-Refer to Figure 10-10. Consider the budget constraint BC1. If the price of DVDs is $20 and the price of CDs is $10, what is the consumer's income?

Accepted Answer

A)  $120 
B)  $240 
C)  $360 
D)  $480 
A)  $120 
B)  $240 
C)  $360 
D)  $480

Question 4

The economic model of consumer behavior predicts that

Accepted Answer

A)  consumers will try to earn as much income as they can over their lifetimes. 
B)  consumers will choose to buy the combination of goods and services that make them as well off as possible from those combinations that their budgets allow them to buy. 
C)  consumers will try to accumulate as many goods and services as they can before they die. 
D)  consumers divide their time between consumption and leisure activities in order to maximize social welfare. 
A)  consumers will try to earn as much income as they can over their lifetimes. 
B)  consumers will choose to buy the combination of goods and services that make them as well off as possible from those combinations that their budgets allow them to buy. 
C)  consumers will try to accumulate as many goods and services as they can before they die. 
D)  consumers divide their time between consumption and leisure activities in order to maximize social welfare.

Question 5

Under J.C. Penney's everyday low pricing policy, the everyday low prices

Accepted Answer

A)  ended up being the highest prices ever charged by the company. 
B)  were always lower than the sale prices under the previous policy. 
C)  were not actually charged every day, but only once a month during half-off sales. 
D)  ended up being higher than the sale prices under the previous pricing policy. 
A)  ended up being the highest prices ever charged by the company. 
B)  were always lower than the sale prices under the previous policy. 
C)  were not actually charged every day, but only once a month during half-off sales. 
D)  ended up being higher than the sale prices under the previous pricing policy.

Question 6

Figure 10-5  
-Refer to Figure 10-5. What is the marginal rate of substitution for one bar of chocolate between h and j?

Accepted Answer

A)    of a cookie. 
B)    of a cookie. 
C)  2 cookies. 
D)  4 cookies. 
A)    of a cookie. 
B)    of a cookie. 
C)  2 cookies. 
D)  4 cookies.

Question 7

The income effect of a decrease in the price of legal services, a normal good, results in

Accepted Answer

A)  a decrease in the demand for legal services. 
B)  a decrease in the quantity of legal services demanded. 
C)  an increase in the quantity of legal services demanded. 
D)  an increase in the demand for legal services. 
A)  a decrease in the demand for legal services. 
B)  a decrease in the quantity of legal services demanded. 
C)  an increase in the quantity of legal services demanded. 
D)  an increase in the demand for legal services.

Question 8

Along a downward-sloping linear demand curve

Accepted Answer

A)  the marginal utility from the consumption of each unit of the good and the total utility from consuming larger quantities increase. 
B)  the marginal utility from the consumption of each unit of the good and the total utility from consuming larger quantities remain constant. 
C)  the marginal utility from the consumption of each unit of the good falls and the total utility from consuming larger quantities increases. 
D)  the marginal utility from the consumption of each unit of the good rises and the total utility from consuming larger quantities remain constant. 
A)  the marginal utility from the consumption of each unit of the good and the total utility from consuming larger quantities increase. 
B)  the marginal utility from the consumption of each unit of the good and the total utility from consuming larger quantities remain constant. 
C)  the marginal utility from the consumption of each unit of the good falls and the total utility from consuming larger quantities increases. 
D)  the marginal utility from the consumption of each unit of the good rises and the total utility from consuming larger quantities remain constant.

Question 9

After getting an A on your economics exam, you decide to go to your favorite Mexican restaurant to celebrate. You are having trouble deciding whether to order the chipotle chicken chimichanga or the cilantro seafood enchiladas. Use the rule of equal marginal utility per dollar to determine which one to purchase: (a) the chimichanga for $8 which gives you 120 units of utility, or (b) the enchiladas for $15 which gives you 195 units of utility? Assume your budget is large enough to purchase either item.

Accepted Answer

You should buy the chimichanga

Question 10

Consider the following hypothetical scenarios: Scenario A: You are about to purchase a pair of 7 for All Mankind jeans for $175 and a t-shirt for $45. The sales attendant at the store tells you that the pair of jeans you wish to buy is on sale for $160 at another store, located about a 20-minute drive away.
Scenario B: You are about to purchase a pair of 7 for All Mankind jeans for $175 and a t-shirt for $45. The sales attendant at the store tells you that the t-shirt you wish to buy is on sale for $30 at another store, located about a 20-minute drive away.
Based on standard economic theory, under which scenario would you make the 20-minute trip to the other store?

Accepted Answer

A)  Scenario A because the pair of jeans is a very expensive item and $15 saving is quite substantial 
B)  Scenario B because a $15 saving amounts to a substantial discount (about 33 percent) 
C)  in either scenario if I think a $15 savings is worth the 20-minute trip 
D)  in none of these scenarios if I think the $15 saving is not worth the 20-minute trip 
E)  C and D are correct answers. 
A)  Scenario A because the pair of jeans is a very expensive item and $15 saving is quite substantial 
B)  Scenario B because a $15 saving amounts to a substantial discount (about 33 percent) 
C)  in either scenario if I think a $15 savings is worth the 20-minute trip 
D)  in none of these scenarios if I think the $15 saving is not worth the 20-minute trip 
E)  C and D are correct answers.

Question 11

Which of the following is explained by the law of diminishing marginal utility?

Accepted Answer

A)  The marginal utility of Isabel's second bottle of Coca-Cola is greater than the marginal utility of her third bottle of Coca-Cola. 
B)  The marginal utility of Isabel's second bottle of Coca-Cola is greater than the marginal utility of her third pretzel. 
C)  The marginal utility of Isabel's second bottle of Coca-Cola is greater than the marginal utility of her friend Margie's third pretzel. 
D)  The total utility of one bottle of Coca-Cola is greater than the total utility of two bottles of Coca-Cola. 
A)  The marginal utility of Isabel's second bottle of Coca-Cola is greater than the marginal utility of her third bottle of Coca-Cola. 
B)  The marginal utility of Isabel's second bottle of Coca-Cola is greater than the marginal utility of her third pretzel. 
C)  The marginal utility of Isabel's second bottle of Coca-Cola is greater than the marginal utility of her friend Margie's third pretzel. 
D)  The total utility of one bottle of Coca-Cola is greater than the total utility of two bottles of Coca-Cola.

Question 12

Standard economic theory asserts that sunk costs are irrelevant in making economic decisions, yet studies conducted by behavioral economists reveal that sunk costs often affect economic decisions. Which of the following could explain this observation?

Accepted Answer

A)  People measure the value of a good in terms of its purchase price. 
B)  Even though sunk costs cannot be recovered, it has been incurred and therefore should be treated as part of the product's value. 
C)  If consumers maximize their utility, it makes sense to consider the full purchase price of a product in their consumption decisions. 
D)  Sunk costs have a higher opportunity cost than costs that can be recovered. 
A)  People measure the value of a good in terms of its purchase price. 
B)  Even though sunk costs cannot be recovered, it has been incurred and therefore should be treated as part of the product's value. 
C)  If consumers maximize their utility, it makes sense to consider the full purchase price of a product in their consumption decisions. 
D)  Sunk costs have a higher opportunity cost than costs that can be recovered.

Question 13

The limitation that a consumer's total expenditure on goods and services purchased cannot exceed the income available is referred to as

Accepted Answer

A)  maximizing behavior. 
B)  economizing behavior. 
C)  the price constraint. 
D)  the budget constraint. 
A)  maximizing behavior. 
B)  economizing behavior. 
C)  the price constraint. 
D)  the budget constraint.

Question 14

Music writer Anthony Kuzminski praised the late rock star Tom Petty in a 2007 article in the online Unrated Magazine. Kuzminski wrote: "Something Petty never can get enough credit for is his fan-friendly attitude. He kept ticket prices for [his concerts] at $50 when other acts this summer are charging upwards of $100 for stadium gigs. Petty could charge more, but he doesn't see the point. He has stated time and time again he still makes millions when he's on the road, regardless of his ticket prices. He is the last of the fan friendly rock stars out there." Use economic reasoning to write a rationale for Tom Petty's decision to charge prices for his band's ("Tom Petty and the Heartbreakers") concerts that were less than market clearing prices.
Source: Anthony Kuzminski, "Tom Petty & The Heartbreakers at the Vic Theater" http://www.unratedmagazine.com/

Accepted Answer

Tickets to Tom Petty's concerts consiste

Question 15

For a demand curve to be upward sloping, the good would have to be an inferior good, and

Accepted Answer

A)  the income effect would have to be larger than the substitution effect. 
B)  the income effect would have to be smaller than the substitution effect. 
C)  the income effect would have to be equal to the substitution effect. 
D)  the income effect and the substitution effect would have to be nonexistent. 
A)  the income effect would have to be larger than the substitution effect. 
B)  the income effect would have to be smaller than the substitution effect. 
C)  the income effect would have to be equal to the substitution effect. 
D)  the income effect and the substitution effect would have to be nonexistent.

Question 16

A construction project in Congressman Foghorn's district is unfinished. Foghorn has asked that a new appropriations bill include funds to complete the project, despite a report by an independent agency that the project is a waste of taxpayer money. Foghorn's project is a bridge that crosses a river between two cities in his district. The press has criticized Foghorn and dubbed the project "a bridge too far" since another bridge, located closer to the same two cities Foghorn's bridge will connect, already exists and can accommodate all traffic between the two cities. Foghorn argues that if the bridge project is not completed, the $50 million already spent will have been wasted. Is Foghorn's argument economically rational? Explain your answer.

Accepted Answer

Foghorn's argument is not rational. The

Question 17

The substitution effect of a price increase causes a decrease in the quantity of an inferior good demanded.

Accepted Answer

A) True 
 B)False

Question 18

________ is an experiment that tests the significance of fairness in consumer decision making.

Accepted Answer

A)  The fairness challenge 
B)  The consumer choice paradigm 
C)  The ultimatum game 
D)  The Giffen paradox 
A)  The fairness challenge 
B)  The consumer choice paradigm 
C)  The ultimatum game 
D)  The Giffen paradox

Question 19

If the price of muffins, a normal good you enjoy, rises, then

Accepted Answer

A)  the income and substitution effects offset each other but the price effect leads you to buy fewer muffins. 
B)  both the income and substitution effects lead you to buy fewer muffins. 
C)  the substitution effect which causes you to decrease your muffin consumption outweighs the income effect which causes you to increase your muffin consumption, resulting in fewer muffins purchased. 
D)  the income effect which causes you to decrease your muffin consumption outweighs the substitution effect which causes you to increase your muffin consumption, resulting in fewer muffins purchased. 
A)  the income and substitution effects offset each other but the price effect leads you to buy fewer muffins. 
B)  both the income and substitution effects lead you to buy fewer muffins. 
C)  the substitution effect which causes you to decrease your muffin consumption outweighs the income effect which causes you to increase your muffin consumption, resulting in fewer muffins purchased. 
D)  the income effect which causes you to decrease your muffin consumption outweighs the substitution effect which causes you to increase your muffin consumption, resulting in fewer muffins purchased.

Question 20

Figure 10-7   The above panels show various combinations of indifference curves and budget constraints for two products: Popcorn and Candy.
-Refer to Figure 10-7. A change in the price of popcorn only is shown in

Accepted Answer

A)  Panel A. 
B)  Panel B. 
C)  Panel C. 
D)  none of the above panels. 
A)  Panel A. 
B)  Panel B. 
C)  Panel C. 
D)  none of the above panels.

Exam 10: Consumer Choice and Behavioral Economics

The absolute value of the slope of the budget constraint is equal to

What happens to the absolute value of the marginal rate of substitution as you move down a convex (bowed toward the origin) indifference curve?

Figure 10-10 -Refer to Figure 10-10. Consider the budget constraint BC1. If the price of DVDs is $20 and the price of CDs is $10, what is the consumer's income?

The economic model of consumer behavior predicts that

Under J.C. Penney's everyday low pricing policy, the everyday low prices

Figure 10-5 -Refer to Figure 10-5. What is the marginal rate of substitution for one bar of chocolate between h and j?

The income effect of a decrease in the price of legal services, a normal good, results in

Along a downward-sloping linear demand curve

Which of the following is explained by the law of diminishing marginal utility?

Standard economic theory asserts that sunk costs are irrelevant in making economic decisions, yet studies conducted by behavioral economists reveal that sunk costs often affect economic decisions. Which of the following could explain this observation?

The limitation that a consumer's total expenditure on goods and services purchased cannot exceed the income available is referred to as

For a demand curve to be upward sloping, the good would have to be an inferior good, and

The substitution effect of a price increase causes a decrease in the quantity of an inferior good demanded.

________ is an experiment that tests the significance of fairness in consumer decision making.

If the price of muffins, a normal good you enjoy, rises, then

Figure 10-7 The above panels show various combinations of indifference curves and budget constraints for two products: Popcorn and Candy. -Refer to Figure 10-7. A change in the price of popcorn only is shown in

Economics: Foundations and Models

Trade-Offs, Comparative Advantage, and the Market System

Where Prices Come From: the Interaction of Demand and Supply

Economic Efficiency, Government Price Setting, and Taxes

Externalities, Environmental Policy, and Public Goods

Elasticity: the Responsiveness of Demand and Supply

The Economics of Health Care

Firms, the Stock Market, and Corporate Governance

Comparative Advantage and the Gains From International Trade

Technology, Production, and Costs

Firms in Perfectly Competitive Markets

Monopolistic Competition: the Competitive Model in a More Realistic Setting

Oligopoly: Firms in Less Competitive Markets

Monopoly and Antitrust Policy

Pricing Strategy

The Markets for Labor and Other Factors of Production

Public Choice, Taxes, and the Distribution of Income

Gdp: Measuring Total Production and Income

Unemployment and Inflation

Economic Growth, the Financial System, and Business Cycles

Long-Run Economic Growth: Sources and Policies

Aggregate Expenditure and Output in the Short Run

Aggregate Demand and Aggregate Supply Analysis

Money, Banks, and the Federal Reserve System

Monetary Policy

Fiscal Policy

Inflation, Unemployment, and Federal Reserve Policy

Macroeconomics in an Open Economy

The International Financial System

Filters

Figure 10-10 -Refer to Figure 10-10. Consider the budget constraint BC₁. If the price of DVDs is $20 and the price of CDs is $10, what is the consumer's income?