Exam 21: The Theory of Consumer Choice

John is planning ahead for retirement in a two-period world.When John is young he will earn $1 million,and when John is old and retired he will be given $50,000 from Social Security.If the interest rate between the two time periods is 7 percent,what is the slope of John's budget constraint when considering the consumption possibilities between the two periods if "consumption when young" is graphed on the horizontal axis?

Pepsi and pizza are normal goods.When the price of pizza falls,the substitution effect causes a

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?

A Giffen good can be explained as a good for which an increase in the price

Scenario 21-3 Diane knows that she will ultimately face retirement. Assume that Diane 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. Diane can earn $250,000 during her working period and nothing in her retirement period. She must both save and consume in her work period with an interest rate of 10 percent on savings. -Refer to Scenario 21-3.If the interest rate on savings increases,it is possible that

When considering her budget,the highest indifference curve that a consumer can reach is the

Assume that a person consumes two goods,Coke and Snickers.Use a graph to demonstrate how the consumer adjusts his/her 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.)

Assume that a college student spends her income on books and pizza.The price of a pizza is $8.00,and the price of a book is $15.If she has $100 of income,she could choose to consume

Figure 21-2 -Refer to Figure 21-2.Which of the graphs in the figure reflects an increase in the price of good Y only?

A rational consumer is likely to have maximized her

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

Answer the following questions based on the table.A consumer is able to consume the following bundles of rice and beans when the price of rice is $2 and the price of beans is $3. a.How much is this consumer's income? b.Draw a budget constraint given this information.Label it B. c.Construct a new budget constraint showing the change if the price of rice falls $1.Label this C. d.Given the original prices for rice ($2) and beans ($3), construct a new budget constraint if this consumer's income increased to $48.Label this D.

Indifference curves graphically represent

The following diagram shows one indifference curve representing the preferences for goods x and y for one consumer. What is the marginal rate of substitution between points A and B?

The labor supply curve may have a "backward bending" portion because at higher wages the

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

Suppose the price of good x falls and the consumption of good x increases.From this we can infer that

Consider the indifference curve map and budget constraint for two goods (B and K).Suppose the good on the horizontal axis (K)is inferior and Giffen.When the price of the inferior good on the horizontal axis (K)increases

The two "goods" used when economists analyze labor supply are

When the indifference curve is tangent to the budget constraint,