Question 1

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

Accepted Answer

A) True 
 B)False

Question 2

The increase in consumption of a good when its price falls is caused by two effects. What are these two effects? Explain the difference between these effects.

Accepted Answer

The two effects are the substitution and

Question 3

Marginal utility can be

Accepted Answer

A)  negative. 
B)  zero. 
C)  positive. 
D)  positive, negative or zero. 
A)  negative. 
B)  zero. 
C)  positive. 
D)  positive, negative or zero.

Question 4

Which of the following is held constant along an indifference curve?

Accepted Answer

A)  the prices of the goods in question 
B)  the marginal rate of substitution between the two goods in question 
C)  the marginal utility derived from consuming any bundle of goods on the indifference curve 
D)  the total utility derived from consuming any bundle of goods on the indifference curve 
A)  the prices of the goods in question 
B)  the marginal rate of substitution between the two goods in question 
C)  the marginal utility derived from consuming any bundle of goods on the indifference curve 
D)  the total utility derived from consuming any bundle of goods on the indifference curve

Question 5

The income effect of a price increase for a Giffen good outweighs the substitution effect.

Accepted Answer

A) True 
 B)False

Question 6

Economists have used ________ and ________ in experiments designed to determine whether consumers care about fairness when they make decisions.

Accepted Answer

A)  Giffen goods; luxury goods 
B)  the income effect; the substitution effect 
C)  the ultimatum game; the dictator game 
D)  network externalities; the endowment effect 
A)  Giffen goods; luxury goods 
B)  the income effect; the substitution effect 
C)  the ultimatum game; the dictator game 
D)  network externalities; the endowment effect

Question 7

Arnold Kim began blogging about Apple products during his fourth year of medical school. Kim's website, MacRumors.com, became so successful that he decided to give up his medical career and work full time on his website, despite the nearly $200,000 he had invested in his education. In making his decision, the $200,000 he spent on his education

Accepted Answer

A)  should be ignored since it represents a sunk cost. 
B)  should be considered since it is money he has spent and needs to recoup. 
C)  should be ignored only if Kim can earn more than $200,000 by running his website. 
D)  should be considered since it is money he could have used to invest in his website. 
A)  should be ignored since it represents a sunk cost. 
B)  should be considered since it is money he has spent and needs to recoup. 
C)  should be ignored only if Kim can earn more than $200,000 by running his website. 
D)  should be considered since it is money he could have used to invest in his website.

Question 8

If marginal utility of apples is diminishing and is a positive amount, consuming one more apple will cause

Accepted Answer

A)  total utility to decrease. 
B)  a consumer to get no satisfaction from consuming apples. 
C)  a consumer's total utility to increase. 
D)  a consumer to go beyond her optimal consumption of apples. 
A)  total utility to decrease. 
B)  a consumer to get no satisfaction from consuming apples. 
C)  a consumer's total utility to increase. 
D)  a consumer to go beyond her optimal consumption of apples.

Question 9

Why do convex indifference curve have a negative slope?

Accepted Answer

A)  because consumers take market prices as given 
B)  because consumers face a budget constraint 
C)  because to keep utility constant, a consumer must get more of one good if she is to give up some of the other 
D)  because scarcity implies that it is not possible to consume more of one good without giving up some of the other 
A)  because consumers take market prices as given 
B)  because consumers face a budget constraint 
C)  because to keep utility constant, a consumer must get more of one good if she is to give up some of the other 
D)  because scarcity implies that it is not possible to consume more of one good without giving up some of the other

Question 10

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

Question 11

If you received negative marginal utility from consuming the 4th slice of pizza, then your total utility from 4 slices of pizza must be less than your total utility from 3 slices of pizza.

Accepted Answer

A) True 
 B)False

Question 12

Consider a downward-sloping demand curve. When the price of a normal good increases, the income and substitution effects

Accepted Answer

A)  work in the same direction to increase quantity demanded. 
B)  work in the same direction to decrease quantity demanded. 
C)  work in opposite directions, and quantity demanded increases. 
D)  work in opposite directions, and quantity demanded decreases. 
A)  work in the same direction to increase quantity demanded. 
B)  work in the same direction to decrease quantity demanded. 
C)  work in opposite directions, and quantity demanded increases. 
D)  work in opposite directions, and quantity demanded decreases.

Question 13

Figure 10-7   Manuri has $300 to spend on Pilates classes and Yoga classes. The price of a group Pilates class is $20 and the price of a group Yoga class is $10. Manuri's optimal bundle is given by "A" in Figure 10-7.
-Refer to Figure 10-7. Suppose the price of Pilates sessions rises to $30 while income and the price of Yoga sessions remain unchanged. What is her new optimal bundle?

Accepted Answer

A)  still remains at bundle A. 
B)  bundle B. 
C)  bundle C. 
D)  bundle D. 
A)  still remains at bundle A. 
B)  bundle B. 
C)  bundle C. 
D)  bundle D.

Question 14

You participate in a taste test for a new protein supplement called "Boost." You are given five consecutive one ounce vials of the supplement and after consuming each vial you are asked to note your reaction. You consume the first vial and your response is: "Hmmm, quite good!" After the second, you say, "Not bad at all." After the third, you note, "It's alright." and after the fourth you wince, "No more, the after-taste is getting to me. I need water." What economic principle does this scenario illustrate? Define the principle.

Accepted Answer

It illustrates the law of diminishing ma

Question 15

In making decisions about what to consume, a person's goal is to

Accepted Answer

A)  allocate her limited income among all the products she wishes to buy so that she receives the highest total utility. 
B)  buy low-priced goods rather than high-priced goods. 
C)  maximize her marginal utility from the goods and services she wishes to buy using her limited income. 
D)  consume as many necessities as possible and then, if there is money left over, to buy luxuries. 
A)  allocate her limited income among all the products she wishes to buy so that she receives the highest total utility. 
B)  buy low-priced goods rather than high-priced goods. 
C)  maximize her marginal utility from the goods and services she wishes to buy using her limited income. 
D)  consume as many necessities as possible and then, if there is money left over, to buy luxuries.

Question 16

A standard which came to the market first, such as the QWERTY letter layout in typewriters, can become entrenched (this layout is still used in computer keyboards today). What is this phenomenon called?

Accepted Answer

A)  network externalities 
B)  path dependency 
C)  sunk cost 
D)  comparative advantage 
A)  network externalities 
B)  path dependency 
C)  sunk cost 
D)  comparative advantage

Question 17

Avner is maximizing total utility by buying sports magazines and protein supplements. For him to buy more sports magazines,

Accepted Answer

A)  the price of protein supplements has to fall. 
B)  the price of sports magazines has to fall. 
C)  the price of sports magazines has to rise. 
D)  Since Avner is maximizing his utility, nothing can change the consumption of sports magazines. 
A)  the price of protein supplements has to fall. 
B)  the price of sports magazines has to fall. 
C)  the price of sports magazines has to rise. 
D)  Since Avner is maximizing his utility, nothing can change the consumption of sports magazines.

Question 18

An advantage of Microsoft windows is its compatibility with the widest range of hardware and software. The dominance of Windows is self-reinforcing: hardware and software manufacturers ensure that their products are compatible with Windows in order to have access to the large number of Windows users. Which principle best describes this scenario?

Accepted Answer

A)  endowment effects 
B)  endorsement effects 
C)  economies of scale 
D)  network externalities 
A)  endowment effects 
B)  endorsement effects 
C)  economies of scale 
D)  network externalities

Question 19

Figure 10-8  
-Refer to Figure 10-8. Given the budget constraint in the diagram, which of the following statements is false?

Accepted Answer

A)  The consumer receives the same level of utility from consumption bundles d, e and f. 
B)  Consumption bundles b and c yield the same level of utility, which is higher than the utility represented by bundle a. 
C)  Although the consumer receives the same level of utility from bundles d and e, she cannot afford to purchase bundle d. 
D)  The consumer's optimal bundle could be bundle d, e or f. 
A)  The consumer receives the same level of utility from consumption bundles d, e and f. 
B)  Consumption bundles b and c yield the same level of utility, which is higher than the utility represented by bundle a. 
C)  Although the consumer receives the same level of utility from bundles d and e, she cannot afford to purchase bundle d. 
D)  The consumer's optimal bundle could be bundle d, e or f.

Question 20

If preferences are transitive, indifference curves

Accepted Answer

A)  intersect at the equilibrium consumption bundle. 
B)  intersect at the optimum consumption bundle. 
C)  intersect where the marginal rate of substitution for each indifference curve is equal. 
D)  do not intersect. 
A)  intersect at the equilibrium consumption bundle. 
B)  intersect at the optimum consumption bundle. 
C)  intersect where the marginal rate of substitution for each indifference curve is equal. 
D)  do not intersect.

Exam 10: Consumer Choice and Behavioral Economics

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

The increase in consumption of a good when its price falls is caused by two effects. What are these two effects? Explain the difference between these effects.

Marginal utility can be

Which of the following is held constant along an indifference curve?

The income effect of a price increase for a Giffen good outweighs the substitution effect.

Economists have used ________ and ________ in experiments designed to determine whether consumers care about fairness when they make decisions.

If marginal utility of apples is diminishing and is a positive amount, consuming one more apple will cause

Why do convex indifference curve have a negative slope?

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

If you received negative marginal utility from consuming the 4th slice of pizza, then your total utility from 4 slices of pizza must be less than your total utility from 3 slices of pizza.

Consider a downward-sloping demand curve. When the price of a normal good increases, the income and substitution effects

In making decisions about what to consume, a person's goal is to

A standard which came to the market first, such as the QWERTY letter layout in typewriters, can become entrenched (this layout is still used in computer keyboards today). What is this phenomenon called?

Avner is maximizing total utility by buying sports magazines and protein supplements. For him to buy more sports magazines,

Figure 10-8 -Refer to Figure 10-8. Given the budget constraint in the diagram, which of the following statements is false?

If preferences are transitive, indifference curves

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

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Economists have used and in experiments designed to determine whether consumers care about fairness when they make decisions.