Question 1

Giffen goods violate the law of demand.

Accepted Answer

A) True 
 B)False

Question 2

For a typical consumer,indifference curves can intersect if they satisfy the property of transitivity.

Accepted Answer

A) True 
 B)False

Question 3

If an indifference curve is bowed out away from the origin,the marginal rate of substitution is

Accepted Answer

A)  not likely to reflect the relative value of goods. 
B)  likely to be constant for all bundles along the indifference curve. 
C)  likely to be identical to the price ratio for each bundle along the indifference curve. 
D)  different for each bundle along the indifference curve.

Question 4

A decrease in the price of DVD players leads consumers to buy more DVD players.From this information we can conclude that DVD players

Accepted Answer

A)  are normal goods. 
B)  are inferior goods. 
C)  are luxury goods. 
D)  could be any of the above.

Question 5

Figure 21-19
The following graph illustrates a representative consumer's preferences for marshmallows and chocolate chip cookies:
 
-Refer to Figure 21-19.Assume that the consumer has an income of $80.If the price of chocolate chips is $4 and the price of marshmallows is $4,the optimizing consumer would choose to purchase

Accepted Answer

A)  9 marshmallows and 6 chocolate chips. 
B)  10 marshmallows and 10 chocolate chips. 
C)  5 marshmallows and 5 chocolate chips. 
D)  3 marshmallows and 9 chocolate chips.

Question 6

Janet knows that she will ultimately face retirement.Assume that Janet will experi-ence 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 working period and nothing in her retirement period.She must both save and consume in her work period and can earn 10 percent 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 14 percent.Discuss the role of income and substitution effects in determining whether Janet will increase,or decrease her savings in the work period.

Accepted Answer

The answer of Janet knows that she will ultimately face...

Question 7

Higher education is a normal good.If its price falls,

Accepted Answer

A)  the quantity demanded of higher education will fall. 
B)  the substitution and income effects work in opposite directions. 
C)  the income effect is positive. 
D)  higher education will be a Giffen good.

Question 8

Suppose Rich always uses two packets of sugar with his coffee.Rich's indifference curves for sugar and coffee are

Accepted Answer

A)  bowed inward. 
B)  bowed outward. 
C)  straight lines. 
D)  L shaped.

Question 9

If an increase in the interest rate raises savings,then

Accepted Answer

A)  the substitution effect is greater than the income effect. 
B)  the income effect is greater than the substitution effect. 
C)  the income effect and the substitution effect move in the same direction. 
D)  we are unable to determine the sizes of the income and substitution effects without more information.

Question 10

A typical consumer consumes both coffee and donuts.After the consumer's income decreases,the consumer consumes more coffee but fewer donuts than before.For this consumer,coffee is a normal good,but donuts are an inferior good.

Accepted Answer

A) True 
 B)False

Question 11

Figure 21-11
 
-Refer to Figure 21-11.What is the consumer's marginal rate of substitution as she moves from A to B?

Accepted Answer

A)  12 
B)  6 
C)  4 
D)  1

Question 12

If the income effect counteracts the substitution effect,we know that the good in question is a(n)

Accepted Answer

A)  complementary good. 
B)  inferior good. 
C)  luxury good. 
D)  normal good.

Question 13

If an indifference curve is bowed in toward the origin,the marginal rate of substitution is

Accepted Answer

A)  not likely to reflect the relative value of goods. 
B)  likely to be constant for all bundles along the indifference curve. 
C)  likely to be identical to the price ratio for each bundle along the indifference curve. 
D)  different for each bundle along the indifference curve.

Question 14

A consumer

Accepted Answer

A)  is equally satisfied with any indifference curve. 
B)  prefers indifference curves with positive slopes. 
C)  prefers higher indifference curves to lower indifference curves. 
D)  prefers indifference curves that are straight lines to indifference curves that are right angles.

Question 15

The theory of consumer choice illustrates that people face tradeoffs,which is one of the Ten Principles of Economics.

Accepted Answer

A) True 
 B)False

Question 16

Traci consumes two goods,lemonade and pretzels.Lemonade costs $1 per glass,and she consumes it to the point where the marginal utility she receives from her last glass of lemonade is 3.Pretzels cost $2 per bag.The relationship between the marginal utility Traci gets from eating a bag of pretzels and the number of bags she eats per month is as follows: 
If Traci is maximizing his utility,how much does she spend on potato chips each month?

Accepted Answer

A)  $2 
B)  $6 
C)  $8 
D)  $12

Question 17

The slope of a consumer's budget constraint is unaffected by a change in income.

Accepted Answer

A) True 
 B)False

Question 18

The following diagram shows a budget constraint for a particular consumer. 
If the price of X is $5,what is the price of Y?

Accepted Answer

A)  $2 
B)  $10 
C)  $30 
D)  $300

Question 19

At a consumer's optimal choice,the consumer chooses the combination of goods that equates the marginal rate of substitution and the price ratio.

Accepted Answer

A) True 
 B)False

Question 20

Assume that a college student purchases only Ramen noodles and textbooks.If Ramen noodles are an inferior good and textbooks are a normal good,then the substitution effect associated with a decrease in the price of Ramen noodles,by itself,will result in

Accepted Answer

A)  a decrease in the consumption of textbooks and a decrease in the consumption of Ramen noodles. 
B)  a decrease in the consumption of textbooks and an increase in the consumption of Ramen noodles. 
C)  an increase in the consumption of textbooks and an increase in the consumption of Ramen noodles. 
D)  an increase in the consumption of textbooks and a decrease in the consumption of Ramen noodles.

Exam 21: The Theory of Consumer Choice.

Giffen goods violate the law of demand.

For a typical consumer,indifference curves can intersect if they satisfy the property of transitivity.

If an indifference curve is bowed out away from the origin,the marginal rate of substitution is

A decrease in the price of DVD players leads consumers to buy more DVD players.From this information we can conclude that DVD players

Higher education is a normal good.If its price falls,

Suppose Rich always uses two packets of sugar with his coffee.Rich's indifference curves for sugar and coffee are

If an increase in the interest rate raises savings,then

A typical consumer consumes both coffee and donuts.After the consumer's income decreases,the consumer consumes more coffee but fewer donuts than before.For this consumer,coffee is a normal good,but donuts are an inferior good.

Figure 21-11 -Refer to Figure 21-11.What is the consumer's marginal rate of substitution as she moves from A to B?

If the income effect counteracts the substitution effect,we know that the good in question is a(n)

If an indifference curve is bowed in toward the origin,the marginal rate of substitution is

A consumer

The theory of consumer choice illustrates that people face tradeoffs,which is one of the Ten Principles of Economics.

The slope of a consumer's budget constraint is unaffected by a change in income.

The following diagram shows a budget constraint for a particular consumer. If the price of X is $5,what is the price of Y?

At a consumer's optimal choice,the consumer chooses the combination of goods that equates the marginal rate of substitution and the price ratio.

Assume that a college student purchases only Ramen noodles and textbooks.If Ramen noodles are an inferior good and textbooks are a normal good,then the substitution effect associated with a decrease in the price of Ramen noodles,by itself,will result in