Question 1

Figure: Labor Leisure   Refer to the figure. Which statement is TRUE?

Accepted Answer

A)  The labor supply curve is downward sloping. 
B)  The labor supply curve is upward sloping. 
C)  The income effect denominates the substitution effect. 
D)  The worker earns $6.00 an hour. 
A)  The labor supply curve is downward sloping. 
B)  The labor supply curve is upward sloping. 
C)  The income effect denominates the substitution effect. 
D)  The worker earns $6.00 an hour.

Question 2

Constant marginal utility means that marginal utility ______ as consumption ______.

Accepted Answer

A)  remains constant; increases 
B)  remains constant; decreases 
C)  increases; increases 
D)  increases; decreases 
A)  remains constant; increases 
B)  remains constant; decreases 
C)  increases; increases 
D)  increases; decreases

Question 3

Consumers maximize their utility when:

Accepted Answer

A)  the total benefits are greater than total costs. 
B)  the marginal utility per dollar is equal across all goods consumed and all income is spent. 
C)  they consume the good on which they place the highest overall value. 
D)  they diversify their consumption across goods. 
A)  the total benefits are greater than total costs. 
B)  the marginal utility per dollar is equal across all goods consumed and all income is spent. 
C)  they consume the good on which they place the highest overall value. 
D)  they diversify their consumption across goods.

Question 4

Barry's wage increased and he responded by working more hours. Which statement must be TRUE?

Accepted Answer

A)  Leisure is an inferior good. 
B)  The substitution effect of the wage increase dominated the income effect. 
C)  The income effect of the wage increase dominated the substitution effect. 
D)  The substitution and income effect both increased hours of work. 
A)  Leisure is an inferior good. 
B)  The substitution effect of the wage increase dominated the income effect. 
C)  The income effect of the wage increase dominated the substitution effect. 
D)  The substitution and income effect both increased hours of work.

Question 5

Use the following to answer questions:
Figure: Water and Electricity  
-(Figure: Water and Electricity) Refer to the figure. Using the solid budget constraint in this diagram, how much electricity and water per hour does this individual consume?

Accepted Answer

A)  2 MJ and 9 gallons 
B)  4 MJ and 6 gallons 
C)  6 MJ and 3 gallons 
D)  7 MJ and 5 gallons 
A)  2 MJ and 9 gallons 
B)  4 MJ and 6 gallons 
C)  6 MJ and 3 gallons 
D)  7 MJ and 5 gallons

Question 6

Suppose the price of apples rises making oranges relatively less expensive. The increase in orange consumption as a result of the price change is an example of the income effect.

Accepted Answer

A) True 
 B)False

Question 7

Figure: Labor Supply   Refer to the figure. The figure above represents the budget constraint and indifference curves for the labor-leisure decision of a consumer when the wage rate falls from $20 to $10. Based on the figure,:

Accepted Answer

A)  the income effect will dominate and the consumer will work more. 
B)  the substitution effect will dominate and the consumer will work more. 
C)  the income effect will dominate and the consumer will work less. 
D)  the substitution effect will dominate and the consumer will work less. 
A)  the income effect will dominate and the consumer will work more. 
B)  the substitution effect will dominate and the consumer will work more. 
C)  the income effect will dominate and the consumer will work less. 
D)  the substitution effect will dominate and the consumer will work less.

Question 8

The ______ is the change in consumption caused by a change in relative prices holding the consumer's utility level constant.

Accepted Answer

A)  budget constraint 
B)  indifference curve 
C)  income effect 
D)  substitution effect 
A)  budget constraint 
B)  indifference curve 
C)  income effect 
D)  substitution effect

Question 9

If the marginal utility per dollar for hamburgers is 2, and the marginal utility per dollar for pizza is 1, then this consumer should always consume more hamburgers.

Accepted Answer

A) True 
 B)False

Question 10

Suppose that Barry's wage increases and he responds by working more hours. Which statement must be TRUE?

Accepted Answer

A)  Leisure became more expensive, so Barry consumed less of it. 
B)  The substitution effect of the wage increase caused Barry to substitute leisure for work. 
C)  The income effect of the wage increase dominated the substitution effect of the wage increase. 
D)  The substitution effect increased hours of work and the income effect increased hours of work. 
A)  Leisure became more expensive, so Barry consumed less of it. 
B)  The substitution effect of the wage increase caused Barry to substitute leisure for work. 
C)  The income effect of the wage increase dominated the substitution effect of the wage increase. 
D)  The substitution effect increased hours of work and the income effect increased hours of work.

Question 11

Use the following to answer question 70:
Figure: Water and Electricity 2  
-(Figure: Water and Electricity 2) Refer to the figure. If the price of electricity changed and the price of water stayed the same, causing the change in the budget constraint as indicated by the dashed line, did an income effect play a role in the change in this person's consumption bundle?

Accepted Answer

A)  No, because the new consumption point is on the same indifference curve. 
B)  No, because the new consumption point has less water, not more. 
C)  Yes, because there was a change in relative prices. 
D)  Yes, because after keeping utility constant this person still buys more electricity. 
A)  No, because the new consumption point is on the same indifference curve. 
B)  No, because the new consumption point has less water, not more. 
C)  Yes, because there was a change in relative prices. 
D)  Yes, because after keeping utility constant this person still buys more electricity.

Question 12

If your brother, a partner at a major law firm, spent $90 for a ticket to the Rockstar Energy Mayhem Festival, and then lost his ticket, should he buy another $90 ticket?

Accepted Answer

A)  Yes, there is no substitution effect and the income effect is trivial for a partner in a major law firm. 
B)  Yes, there is a positive substitution effect and the income effect is large for a partner in a major law firm. 
C)  No, there is some substitution effect and the income effect is trivial for a partner in a major law firm. 
D)  No, there is a positive substitution effect and the income effect is large for a partner in a major law firm. 
A)  Yes, there is no substitution effect and the income effect is trivial for a partner in a major law firm. 
B)  Yes, there is a positive substitution effect and the income effect is large for a partner in a major law firm. 
C)  No, there is some substitution effect and the income effect is trivial for a partner in a major law firm. 
D)  No, there is a positive substitution effect and the income effect is large for a partner in a major law firm.

Question 13

The consumption bundle that maximizes utility for a consumer is the bundle that maximizes marginal utility across all goods.

Accepted Answer

A) True 
 B)False

Question 14

Figure: Consumption Bundle   Refer to the figure. Which statement is FALSE?

Accepted Answer

A)  The optimal consumption bundle contains five movie downloads and 10 music downloads. 
B)  The MRS is 0.50 at the optimal consumption bundle. 
C)  The price per music download is half as expensive as the price per movie download. 
D)  In the optimum consumption bundle, the marginal utility of movie downloads equals half the marginal utility of music downloads. 
A)  The optimal consumption bundle contains five movie downloads and 10 music downloads. 
B)  The MRS is 0.50 at the optimal consumption bundle. 
C)  The price per music download is half as expensive as the price per movie download. 
D)  In the optimum consumption bundle, the marginal utility of movie downloads equals half the marginal utility of music downloads.

Question 15

The ______ is the change in consumption caused by a change in purchasing power from a price change.

Accepted Answer

A)  budget constraint 
B)  indifference curve 
C)  income effect 
D)  substitution effect 
A)  budget constraint 
B)  indifference curve 
C)  income effect 
D)  substitution effect

Question 16

Use the following to answer questions:
Figure: Music and Movie Downloads 5  
-(Figure: Music and Movie Downloads 5) Refer to the figure. The consumer in this diagram is initially optimizing consumption at point A than moves to point B. The income effect of the price change causes the consumer to:

Accepted Answer

A)  increase the number of music downloads by 3. 
B)  increase the number of music downloads by 4. 
C)  reduce the number of music downloads by 1. 
D)  reduce the number of music downloads by 3. 
A)  increase the number of music downloads by 3. 
B)  increase the number of music downloads by 4. 
C)  reduce the number of music downloads by 1. 
D)  reduce the number of music downloads by 3.

Question 17

Figure: Sam's Club   Refer to the figure. According to this figure, how much should Sam's Club charge for membership?

Accepted Answer

A)  $60 
B)  $100 
C)  $40 
D)  $10 
A)  $60 
B)  $100 
C)  $40 
D)  $10

Question 18

Use the following to answer questions:
Figure: Coffee and Comic Books  
-(Figure: Coffee and Comic Books) Refer to the figure. A consumer has $2 to spend on comic books (priced at $1 per comic book) and coffee (priced at $1 per cup). To maximize utility, should this consumer buy two cups of coffee?

Accepted Answer

A)  Yes, buying two cups of coffee maximizes the consumer's total utility. 
B)  Yes, because the marginal utility of the second comic book is less than the marginal utility of the second cup of coffee. 
C)  No, the consumer should put back one cup of coffee (losing 16 utils) and replace it with a comic book (gaining 18 utils). 
D)  No, the consumer should buy two comic books to maximize utility. 
A)  Yes, buying two cups of coffee maximizes the consumer's total utility. 
B)  Yes, because the marginal utility of the second comic book is less than the marginal utility of the second cup of coffee. 
C)  No, the consumer should put back one cup of coffee (losing 16 utils) and replace it with a comic book (gaining 18 utils). 
D)  No, the consumer should buy two comic books to maximize utility.

Question 19

If an individual's labor supply curve is downward sloping, this indicates that:

Accepted Answer

A)  the individual has become wealthier. 
B)  the income effect dominates the substitution effect. 
C)  the substitution effect dominates the income effect. 
D)  the individual faces a diminishing marginal utility for leisure. 
A)  the individual has become wealthier. 
B)  the income effect dominates the substitution effect. 
C)  the substitution effect dominates the income effect. 
D)  the individual faces a diminishing marginal utility for leisure.

Question 20

Indifference curves can never cross.

Accepted Answer

A) True 
 B)False

Exam 25: Consumer Choice

Figure: Labor Leisure Refer to the figure. Which statement is TRUE?

Constant marginal utility means that marginal utility ______ as consumption ______.

Consumers maximize their utility when:

Barry's wage increased and he responded by working more hours. Which statement must be TRUE?

Use the following to answer questions: Figure: Water and Electricity -(Figure: Water and Electricity) Refer to the figure. Using the solid budget constraint in this diagram, how much electricity and water per hour does this individual consume?

Suppose the price of apples rises making oranges relatively less expensive. The increase in orange consumption as a result of the price change is an example of the income effect.

Figure: Labor Supply Refer to the figure. The figure above represents the budget constraint and indifference curves for the labor-leisure decision of a consumer when the wage rate falls from $20 to $10. Based on the figure,:

The ______ is the change in consumption caused by a change in relative prices holding the consumer's utility level constant.

If the marginal utility per dollar for hamburgers is 2, and the marginal utility per dollar for pizza is 1, then this consumer should always consume more hamburgers.

Suppose that Barry's wage increases and he responds by working more hours. Which statement must be TRUE?

If your brother, a partner at a major law firm, spent $90 for a ticket to the Rockstar Energy Mayhem Festival, and then lost his ticket, should he buy another $90 ticket?

The consumption bundle that maximizes utility for a consumer is the bundle that maximizes marginal utility across all goods.

Figure: Consumption Bundle Refer to the figure. Which statement is FALSE?

The ______ is the change in consumption caused by a change in purchasing power from a price change.

Use the following to answer questions: Figure: Music and Movie Downloads 5 -(Figure: Music and Movie Downloads 5) Refer to the figure. The consumer in this diagram is initially optimizing consumption at point A than moves to point B. The income effect of the price change causes the consumer to:

Figure: Sam's Club Refer to the figure. According to this figure, how much should Sam's Club charge for membership?

Use the following to answer questions: Figure: Coffee and Comic Books -(Figure: Coffee and Comic Books) Refer to the figure. A consumer has $2 to spend on comic books (priced at $1 per comic book) and coffee (priced at $1 per cup). To maximize utility, should this consumer buy two cups of coffee?

If an individual's labor supply curve is downward sloping, this indicates that:

Indifference curves can never cross.

The Big Ideas

The Power of Trade and Comparative

Supply and Demand

Equilibrium

Elasticity and Its Applications

Taxes and Subsidies

The Price System

Price Ceilings and Floors

International Trade

Externalities- When the Price Is Not Right

Costs and Profit Maximization Under Competition

Competition and the Invisible Hand

Monopoly

Price Discrimination

Oligopoly and Game Theory

Competing for Monopoly

Monopolistic Competition and Advertising

Labor Markets

Public Goods and the Tragedy of the Commons

Political Economy and Public Choice

Economics, Ethics, and Public Policy

Managing Incentives

Stock Markets and Personal Finance

Price Discrimination

Filters

Constant marginal utility means that marginal utility as consumption .