曼昆《经济学原理》（微观）第五版测试题库 (21)

Chapter 21The Theory of Consumer Choice

TRUE/FALSE

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

ANS: T DIF: 1 REF: 21-0 NAT: AnalyticLOC: Utility and consumer choice TOP: Consumer choiceMSC: Definitional

2. A consumer’s budget constraint for goods X and Y is determined by how much the consumer likes good X relative to good Y.

ANS: F DIF: 2 REF: 21-1 NAT: AnalyticLOC: Utility and consumer choice TOP: Budget constraintMSC: Definitional

3. The slope of the budget constraint reveals the relative price of good X compared to good Y.

ANS: T DIF: 2 REF: 21-1 NAT: AnalyticLOC: Utility and consumer choice TOP: Budget constraintMSC: Applicative

4. A budget constraint illustrates bundles that a consumer prefers equally, while an indifference curve illustrates bundles that are equally affordable to a consumer.

ANS: F DIF: 2 REF: 21-1 | 21-2 NAT: AnalyticLOC: Utility and consumer choice TOP: Budget constraintMSC: Applicative

5. For a typical consumer, most indifference curves are bowed inward.

ANS: T DIF: 1 REF: 21-2 NAT: AnalyticLOC: Utility and consumer choice TOP: Indifference curvesMSC: Interpretive

6. For a typical consumer, most indifference curves are downward sloping.

ANS: T DIF: 1 REF: 21-2 NAT: AnalyticLOC: Utility and consumer choice TOP: Indifference curvesMSC: Interpretive

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

ANS: F DIF: 2 REF: 21-2 NAT: AnalyticLOC: Utility and consumer choice TOP: Indifference curvesMSC: Interpretive

8. When two goods are perfect complements, the indifference curves are right angles.

ANS: T DIF: 1 REF: 21-2 NAT: AnalyticLOC: Utility and consumer choice TOP: Perfect complementsMSC: Interpretive

9. The indifference curves for left shoes and right shoes are right angles.

ANS: T DIF: 1 REF: 21-2 NAT: AnalyticLOC: Utility and consumer choice TOP: Perfect complementsMSC: Applicative

10. The indifference curves for perfect substitutes are straight lines.

ANS: T DIF: 1 REF: 21-2 NAT: AnalyticLOC: Utility and consumer choice TOP: Perfect substitutesMSC: Applicative

126

Chapter 21/The Theory of Consumer Choice � 127

11. The indifference curves for nickels and dimes are straight lines.

ANS: T DIF: 1 REF: 21-2 NAT: AnalyticLOC: Utility and consumer choice TOP: Perfect substitutesMSC: Applicative

12. When two goods are perfect substitutes, the indifference curves are right angles.

ANS: F DIF: 1 REF: 21-2 NAT: AnalyticLOC: Utility and consumer choice TOP: Perfect complements | Perfect substitutesMSC: Interpretive

13. If goods A and B are perfect substitutes, then the marginal rate of substitution of good A for good B is constant.

ANS: T DIF: 2 REF: 21-2 NAT: AnalyticLOC: Utility and consumer choice TOP: Marginal rate of substitution | Perfect substitutesMSC: Interpretive

14. The slope at any point on an indifference curve equals the absolute price at which a consumer is willing to substitute one good for the other.

ANS: F DIF: 2 REF: 21-2 NAT: AnalyticLOC: Utility and consumer choice TOP: Marginal rate of substitutionMSC: Interpretive

15. The marginal rate of substitution between goods A and B measures the price of A relative to the price of B.

ANS: F DIF: 2 REF: 21-2 NAT: AnalyticLOC: Utility and consumer choice TOP: Marginal rate of substitutionMSC: Definitional

16. The marginal rate of substitution is the slope of the budget constraint.

ANS: F DIF: 1 REF: 21-2 NAT: AnalyticLOC: Utility and consumer choice TOP: Marginal rate of substitutionMSC: Definitional

17. The marginal rate of substitution is the slope of the indifference curve.

ANS: T DIF: 1 REF: 21-2 NAT: AnalyticLOC: Utility and consumer choice TOP: Marginal rate of substitutionMSC: Definitional

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

ANS: T DIF: 2 REF: 21-3 NAT: AnalyticLOC: Utility and consumer choice TOP: OptimizationMSC: Interpretive

19. At a consumer’s optimal choice, the consumer chooses the combination of goods such that the ratio of the marginal utilities equals the ratio of the prices.

ANS: T DIF: 2 REF: 21-3 NAT: AnalyticLOC: Utility and consumer choice TOP: OptimizationMSC: Interpretive

20. If consumers purchase more of a good when their income rises, the good is a normal good.

ANS: T DIF: 1 REF: 21-3 NAT: AnalyticLOC: Utility and consumer choice TOP: Normal goods | Inferior goodsMSC: Definitional

21. If a consumer purchases more of good B when his income rises, good B is an inferior good.

ANS: F DIF: 1 REF: 21-3 NAT: AnalyticLOC: Utility and consumer choice TOP: Normal goods | Inferior goodsMSC: Definitional


22. If a consumer purchases more of good A when her income falls, good A is an inferior good.

ANS: T DIF: 2 REF: 21-3 NAT: AnalyticLOC: Utility and consumer choice TOP: Inferior goodsMSC: Definitional

23. The income effect of a price change is unaffected by whether the good is a normal or inferior good.

ANS: F DIF: 2 REF: 21-3 NAT: AnalyticLOC: Utility and consumer choice TOP: Income effectMSC: Interpretive

24. The income effect of a price change is the change in consumption that results from the movement to a new indifference curve.

ANS: T DIF: 2 REF: 21-3 NAT: AnalyticLOC: Utility and consumer choice TOP: Income effectMSC: Interpretive

25. The direction of the substitution effect is not influenced by whether the good is normal or inferior.

ANS: T DIF: 3 REF: 21-3 NAT: AnalyticLOC: Utility and consumer choice KEY: Substitution effectMSC: Analytical

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

ANS: F DIF: 2 REF: 21-3 NAT: AnalyticLOC: Utility and consumer choice TOP: Substitution effectMSC: Interpretive

27. All points on a demand curve are optimal consumption points.

ANS: T DIF: 3 REF: 21-3 NAT: AnalyticLOC: Utility and consumer choice TOP: Demand MSC: Analytical

28. Economists use the term Giffen good to describe a good that violates the law of demand.

ANS: T DIF: 2 REF: 21-4 NAT: AnalyticLOC: Utility and consumer choice TOP: Giffen good MSC: Interpretive

29. Giffen goods are inferior goods for which the income effect dominates the substitution effect.

ANS: T DIF: 2 REF: 21-4 NAT: AnalyticLOC: Utility and consumer choice TOP: Giffen good MSC: Definitional

30. Economists have found evidence of a Giffen good when studying the consumption of rice in the Chinese province of Hunan.

ANS: T DIF: 2 REF: 21-4 NAT: AnalyticLOC: Utility and consumer choice TOP: Giffen good MSC: Applicative

31. Katie wins $1 million in her state’s lottery. If Katie drastically reduces the number of hours she works after she wins the money, we can infer that the income effect is larger than the substitution effect for her.

ANS: T DIF: 2 REF: 21-4 NAT: AnalyticLOC: Utility and consumer choice TOP: Labor supplyMSC: Interpretive

32. Susie wins $1 million in her state’s lottery. If Susie keeps working after she wins the money, we can infer that the income effect is larger than the substitution effect for her.

ANS: F DIF: 2 REF: 21-4 NAT: AnalyticLOC: Utility and consumer choice TOP: Labor supplyMSC: Interpretive

33. A rational person can have a negatively-sloped labor supply curve.

ANS: T DIF: 2 REF: 21-4 NAT: AnalyticLOC: Utility and consumer choice TOP: Labor supplyMSC: Applicative


34. The substitution effect in the work-leisure model induces a person to work less in response to higher wages, which tends to make the labor-supply curve slope upward.

ANS: F DIF: 2 REF: 21-4 NAT: AnalyticLOC: Utility and consumer choice TOP: Labor supplyMSC: Interpretive

35. The income effect in the work-leisure model induces a person to work less in response to higher wages, which tends to make the labor-supply curve slope backward.

ANS: T DIF: 2 REF: 21-4 NAT: AnalyticLOC: Utility and consumer choice TOP: Labor supplyMSC: Interpretive

36. Some economists have advocated reducing the taxation of interest and other capital income, arguing that such a policy change would raise the after-tax interest rate that savers can earn and would thereby encourage people to save more.

ANS: T DIF: 2 REF: 21-4 NAT: AnalyticLOC: Utility and consumer choice TOP: Consumption-saving decisionMSC: Interpretive

37. A rise in the interest rate will generally result in people consuming more when they are old if the substitution effect outweighs the income effect.

ANS: T DIF: 2 REF: 21-4 NAT: AnalyticLOC: Utility and consumer choice TOP: Consumption-saving decisionMSC: Interpretive

38. A rise in the interest rate will generally result in people consuming less when they are old if the substitution effect outweighs the income effect.

ANS: F DIF: 2 REF: 21-4 NAT: AnalyticLOC: Utility and consumer choice TOP: Consumption-saving decisionMSC: Interpretive

SHORT ANSWER

1. 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.

RICE BEANS12 06 40 8

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.


ANS:a. $24b.c.d.

DIF: 2 REF: 21-1 NAT: Analytic LOC: Utility and consumer choiceTOP: Budget constraint MSC: Applicative

2. Draw a budget constraint that is consistent with the following prices and income.Income = 200PY = 50PX = 25

a. Demonstrate how your original budget constraint would change if income increases to 500.b. Demonstrate how your original budget constraint would change if PY decreases to 20.c. Demonstrate how your original budget constraint would change if PX increases to 40.

ANS:



3. Assume that a consumer faces the following budget constraints.

a. Assuming that income is the same on both occasions, describe the difference in relative prices between Panel A and Panel B.

b. If income in Panel B is $126, what is the price of good X?c. If income in Panel A is $84, what is the price of good Y?d. Assuming that the price of good X is the same on both occasions, describe the difference in

income and price of good Y between Panel A and Panel B.

ANS:a. The price of good Y is relatively higher in Panel A than Panel B. Said another way, the price of

X is relatively lower in Panel A than Panel B.b. $9c. $12d. Income in Panel A is twice the income in Panel B, and the price of "Y" in Panel B is 1/18 the

price of "Y" in Panel A.


4. Evaluate the following statement, "Warren Buffet is the second richest person in the world. He doesn't face any constraint on his ability to purchase commodities he wants."

ANS:Everyone faces scarcity of resources, regardless of how rich they are because wants are assumed to be infinite.

DIF: 1 REF: 21-1 NAT: Analytic LOC: Utility and consumer choiceTOP: Budget constraint MSC: Interpretive

5. List and briefly explain each of the four properties of indifference curves.

ANS:1: Higher indifference curves are preferred to lower ones, because consumers usually prefer more of something to less of it. 2: Indifference curves are downward sloping. The slope of an indifference curve reflects the rate at which the consumer is willing to substitute one good for another. If the quantity of one good is reduced, the quantity of the other good must increase in order for the consumer to be equally happy. 3: Indifference curves do not cross. If indifference curves did cross, the same point could be on two different curves, thus contradicting the assumption that consumers prefer more of both goods to less. 4: Indifference curves are bowed inward. This is because people are more willing to trade away goods that they have in abundance and less willing to trade away goods of which they have less.

DIF: 1 REF: 21-2 NAT: Analytic LOC: Utility and consumer choiceTOP: Indifference curves MSC: Interpretive


6. Draw indifference curves that reflect the following preferences.a. pencils with white erasers and pencils with pink erasersb. left shoes and right shoesc. potatoes and riced. income and polluted water

ANS:

DIF: 2 REF: 21-2 NAT: Analytic LOC: Utility and consumer choiceTOP: Indifference curves MSC: Applicative


7. Graphically demonstrate the conditions associated with a consumer optimum. Carefully label all curves and axes.

ANS:

Where M=Income

DIF: 1 REF: 21-3 NAT: Analytic LOC: Utility and consumer choiceTOP: Optimization MSC: Applicative

8. Explain the relationship between the budget constraint and indifference curve at a consumer’s optimum.

ANS:Since the budget constraint is tangent to the indifference curve at a consumer’s optimum, the slope of the budget constraint (relative market prices) and the slope of the indifference curve (the marginal rate of substitution) are equal at the optimal consumption point.

DIF: 1 REF: 21-3 NAT: Analytic LOC: Utility and consumer choiceTOP: Consumer choice MSC: Interpretive


9. 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.)

ANS:

If Coke is a normal good, the consumption of Coke will increase when the price decreases. If Coke is an inferior good and the substitution effect dominates, the consumption of Coke will increase when the price decreases. If Coke is an inferior good and the income effect dominates, the consumption of Coke will decrease when the price decreases. If consumption decreases, the demand curve is upward sloping, and Coke would be a Giffen good. Giffen goods are very rare in the real world, and Coke is not likely to be one.

DIF: 2 REF: 21-3 NAT: Analytic LOC: Utility and consumer choiceTOP: Consumer choice MSC: Applicative


10. Using the graph shown, construct a demand curve for M&M's given an income of $10.

ANS:

DIF: 3 REF: 21-3 NAT: Analytic LOC: Utility and consumer choiceTOP: Demand MSC: Analytical


11. Using indifference curves and budget constraints, graphically illustrate the substitution and income effect that would result from a change in the price of a normal good.

ANS:

The graph above illustrates a price decrease for potato chips. Moving from point A to point B illustrates the substitution effect, while moving from point B to point C illustrates the income effect.

DIF: 3 REF: 21-3 NAT: Analytic LOC: Utility and consumer choiceTOP: Income effect | Substitution effect MSC: Applicative

12. Explain the difference between inferior and normal goods. As a developing economy experiences increases in income (measured by GDP), what would you predict to happen to demand for inferior goods?

ANS:Normal goods are those for which consumption increases as income rises. Inferior goods are those for which consumption decreases as income rises. We would expect the demand for inferior goods to decrease as developing countries experience increases in income.

DIF: 2 REF: 21-3 NAT: Analytic LOC: Utility and consumer choiceTOP: Inferior goods | Normal goods MSC: Interpretive

13. Janet knows that she will ultimately face retirement. Assume that Janet 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. 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.

ANS:a. see graph belowb. see graph belowc. see graph below


Substitution effect: Retirement spending becomes less costly, so she should increase saving.Income effect: As income increases she should increase consumption in both periods (thus reducing her saving in the work period.)

DIF: 3 REF: 21-4 NAT: Analytic LOC: Utility and consumer choiceTOP: Consumption-saving decision MSC: Applicative

Sec 00 - The Theory of Consumer Choice

MULTIPLE CHOICE

1. Which of the following does not represent a tradeoff facing a consumer?a. choosing to purchase more of all goodsb. choosing to spend more leisure time and less working timec. choosing to spend more now and consume less in the futured. choosing to purchase less of one good in order to purchase more of another good

ANS: A DIF: 1 REF: 21-0 NAT: AnalyticLOC: Utility and consumer choice TOP: Consumer choiceMSC: Applicative

2. How are the following three questions related: 1) Do all demand curves slope downward? 2) How do wages affect labor supply? 3) How do interest rates affect household saving?a. They all relate to macroeconomics.b. They all relate to monetary economics.c. They all relate to the theory of consumer choice.d. They are not related to each other in any way.

ANS: C DIF: 1 REF: 21-0 NAT: AnalyticLOC: Utility and consumer choice TOP: Consumer choiceMSC: Applicative

3. Just as the theory of the competitive firm provides a more complete understanding of supply, the theory of consumer choice provides a more complete understanding of a. demand.b. profits.c. production possibility frontiers.d. wages.


ANS: A DIF: 1 REF: 21-0 NAT: AnalyticLOC: Utility and consumer choice TOP: Consumer choiceMSC: Interpretive

4. Which of the following statements is correct?a. The theory of consumer choice provides a more complete understanding of supply, just as the

theory of the competitive firm provides a more complete understanding of demand.b. The theory of consumer choice provides a more complete understanding of demand, just as the

theory of the competitive firm provides a more complete understanding of supply.c. Monetary theory provides a more complete understanding of demand, just as the theory of the

competitive firm provides a more complete understanding of supply.d. The theory of public choice provides a more complete understanding of supply, just as the theory of

the competitive firm provides a more complete understanding of demand.

ANS: B DIF: 1 REF: 21-0 NAT: AnalyticLOC: Utility and consumer choice TOP: Consumer choiceMSC: Interpretive

5. When a consumer spends less time enjoying leisure and more time working, she has a. lower income and therefore cannot afford more consumption.b. lower income and therefore can afford more consumption.c. higher income and therefore cannot afford more consumption.d. higher income and therefore can afford more consumption.

ANS: D DIF: 1 REF: 21-0 NAT: AnalyticLOC: Utility and consumer choice TOP: Consumer choiceMSC: Interpretive

6. The theory of consumer choice provides the foundation for understanding the a. structure of a firm.b. profitability of a firm.c. demand for a firm's product.d. supply of a firm's product.

ANS: C DIF: 1 REF: 21-0 NAT: AnalyticLOC: Utility and consumer choice TOP: Consumer choiceMSC: Definitional

7. The theory of consumer choice examinesa. the determination of output in competitive markets.b. the tradeoffs inherent in decisions made by consumers.c. how consumers select inputs into manufacturing production processes.d. the determination of prices in competitive markets.

ANS: B DIF: 1 REF: 21-0 NAT: AnalyticLOC: Utility and consumer choice TOP: Consumer choiceMSC: Definitional

8. The theory of consumer choice most closely examines which of the following Ten Principles of Economics?a. People face trade-offs.b. The cost of something is what you give up to get it.c. Trade can make everyone better off.d. Markets are usually a good way to organize economic activity.

ANS: A DIF: 1 REF: 21-0 NAT: AnalyticLOC: Utility and consumer choice TOP: Consumer choiceMSC: Interpretive


Sec 01- The Theory of Consumer Choice - The Budget Constraint: What the Consumer Can Afford

MULTIPLE CHOICE

1. Karen, Tara, and Chelsea each buy ice cream and paperback novels to enjoy on hot summer days. Ice cream costs $5 per gallon, and paperback novels cost $8 each. Karen has a budget of $80, Tara has a budget of $60, and Chelsea has a budget of $40 to spend on ice cream and paperback novels. Who can afford to purchase 8 gallons of ice cream and 5 paperback novels?a. Karen, Tara, and Chelseab. Karen onlyc. Tara and Chelsea but not Karend. none of the women

ANS: B DIF: 1 REF: 21-1 NAT: AnalyticLOC: Utility and consumer choice TOP: Budget constraintMSC: Applicative

2. Karen, Tara, and Chelsea each buy ice cream and paperback novels to enjoy on hot summer days. Ice cream costs $5 per gallon, and paperback novels cost $8 each. Karen has a budget of $80, Tara has a budget of $60, and Chelsea has a budget of $40 to spend on ice cream and paperback novels. Who can afford to purchase 5 gallons of ice cream and 8 paperback novels?a. Karen, Tara, and Chelseab. Karen onlyc. Tara and Chelsea but not Karend. none of the women

ANS: D DIF: 1 REF: 21-1 NAT: AnalyticLOC: Utility and consumer choice TOP: Budget constraintMSC: Applicative

3. Karen, Tara, and Chelsea each buy ice cream and paperback novels to enjoy on hot summer days. Ice cream costs $5 per gallon, and paperback novels cost $8 each. Karen has a budget of $80, Tara has a budget of $60, and Chelsea has a budget of $40 to spend on ice cream and paperback novels. Who can afford to purchase 4 gallons of ice cream and 5 paperback novels?a. Karen, Tara, and Chelseab. Karen onlyc. Karen and Tara but not Chelsead. none of the women

ANS: C DIF: 1 REF: 21-1 NAT: AnalyticLOC: Utility and consumer choice TOP: Budget constraintMSC: Applicative

4. Karen, Tara, and Chelsea each buy ice cream and paperback novels to enjoy on hot summer days. Ice cream costs $5 per gallon, and paperback novels cost $8 each. Karen has a budget of $80, Tara has a budget of $60, and Chelsea has a budget of $40 to spend on ice cream and paperback novels. Which of the following statements is correct?a. Each woman faces the same budget constraint.b. The slope of the budget constraint is the same for each woman.c. The area underneath the budget constraint is larger for Chelsea than for Karen.d. All of the above are correct.



5. Suppose a consumer has an income of $800 per month and that she spends her entire income each month on beer and bratwurst. The price of a pint of beer is $5, and the price of a bratwurst is $4. Which of the following combinations of beers and bratwursts represents a point that would lie to the interior of the consumer’s budget constraint?a. 160 beers and 200 bratwurstsb. 40 beers and 50 bratwurstsc. 80 beers and 100 bratwurstsd. 160 beers and 0 bratwursts

ANS: B DIF: 2 REF: 21-1 NAT: AnalyticLOC: Utility and consumer choice TOP: Budget constraintMSC: Analytical

6. Suppose a consumer has an income of $800 per month and that she spends her entire income each month on beer and bratwurst. The price of a pint of beer is $5, and the price of a bratwurst is $4. Which of the following combinations of beers and bratwursts represents a point that would lie to the exterior of the consumer’s budget constraint?a. 160 beers and 200 bratwurstsb. 40 beers and 50 bratwurstsc. 80 beers and 100 bratwurstsd. 160 beers and 0 bratwursts

ANS: A DIF: 2 REF: 21-1 NAT: AnalyticLOC: Utility and consumer choice TOP: Budget constraintMSC: Analytical

7. Suppose a consumer has an income of $800 per month and that she spends her entire income each month on beer and bratwurst. The price of a pint of beer is $5, and the price of a bratwurst is $4. Which of the following combinations of beers and bratwursts represents a point that would lie directly on the consumer’s budget constraint?a. 160 beers and 200 bratwurstsb. 40 beers and 50 bratwurstsc. 80 beers and 100 bratwurstsd. 80 beers and 0 bratwursts

ANS: C DIF: 2 REF: 21-1 NAT: AnalyticLOC: Utility and consumer choice TOP: Budget constraintMSC: Analytical

8. Consider two goods, books and hamburgers. The slope of the consumer's budget constraint is measured by thea. consumer's income divided by the price of hamburgers.b. relative price of books and hamburgers.c. consumer's marginal rate of substitution.d. number of books purchased divided by the number of hamburgers purchased.

ANS: B DIF: 2 REF: 21-1 NAT: AnalyticLOC: Utility and consumer choice TOP: Budget constraintMSC: Interpretive

9. Suppose a consumer spends his income on CDs and DVDs. If his income decreases, the budget constraint for CDs and DVDs willa. shift outward, parallel to the original budget constraint.b. shift inward, parallel to the original budget constraint.c. rotate outward along the CD axis because he can afford more CDs.d. rotate outward along the DVD axis because he can afford more DVDs.



10. When the price of a shirt falls, thea. quantity of shirts demanded falls.b. quantity of shirts demanded rises.c. quantity of shirts supplied rises.d. demand for shirts falls.

ANS: B DIF: 1 REF: 21-1 NAT: AnalyticLOC: Utility and consumer choice TOP: Demand MSC: Analytical

11. A budget constraint illustrates the a. prices that a consumer chooses to pay for products he consumes.b. purchases made by consumers.c. consumption bundles that a consumer can afford.d. consumption bundles that give a consumer equal satisfaction.

ANS: C DIF: 1 REF: 21-1 NAT: AnalyticLOC: Utility and consumer choice TOP: Budget constraintMSC: Definitional

12. Assume that a college student spends her income on books and pizza. The price of a pizza is $8, and the price of a book is $15. If she has $100 of income, she could choose to consumea. 8 pizzas and 4 books.b. 4 pizzas and 5 books.c. 9 pizzas and 3 books.d. 4 pizzas and 3 books.


13. Assume that a college student spends her income on mac-n-cheese and CDs. The price of one box of mac-n-cheese is $1, and the price of one CD is $12. If she has $100 of income, she could choose to consumea. 15 boxes of mac-n-cheese and 6 CDs.b. 20 boxes of mac-n-cheese and 7 CDs.c. 10 boxes of mac-n-cheese and 8 CDs.d. 30 boxes of mac-n-cheese and 6 CDs.

ANS: A DIF: 2 REF: 21-1 NAT: AnalyticLOC: Utility and consumer choice TOP: Budget constraintMSC: Applicative

14. A consumer who doesn't spend all of her incomea. would be at a point outside of her budget constraint.b. would be at a point inside her budget constraint.c. must not be consuming positive quantities of all goods.d. must be consuming at a point where her budget constraint touches one of the axes.

ANS: B DIF: 2 REF: 21-1 NAT: AnalyticLOC: Utility and consumer choice TOP: Budget constraintMSC: Interpretive

15. An increase in income will cause a consumer's budget constraint toa. shift outward, parallel to its initial position.b. shift inward, parallel to its initial position.c. pivot around the horizontal axis.d. pivot around the vertical axis.



Figure 21-1

16. Refer to Figure 21-1. Which point in the figure showing a consumer’s budget constraint represents the consumer's income divided by the price of a CD?a. point Ab. point Cc. point Dd. point E


17. Refer to Figure 21-1. A consumer that chooses to spend all of her income could be at which point(s) on the budget constraint?a. A onlyb. E onlyc. B, C, or D onlyd. A, B, C, or D only


18. Refer to Figure 21-1. All of the points identified in the figure represent affordable consumption options with the exception ofa. A.b. E.c. A and E.d. None. All points are affordable.



Figure 21-2

W

V

X

Y

Z

Pizza

Pepsi

19. Refer to Figure 21-2. A consumer that chooses to spend all of her income could be at which point(s) on the budget constraint?a. V onlyb. Z onlyc. V, W, X, or Y onlyd. W, X, or Y only


20. Refer to Figure 21-2. Which points are affordable?a. W, X, and Y onlyb. Z onlyc. V, W, X, and Y onlyd. V, W, X, Y, and Z


21. Refer to Figure 21-2. Which of the following statements is not correct?a. Points W, X, and Y all cost the consumer the same amount of money.b. Point Z is unaffordable for the consumer given his budget constraint.c. Point V costs less than point Z.d. Points W, X, and Y give the consumer the same level of satisfaction.

ANS: D DIF: 2 REF: 21-1 NAT: AnalyticLOC: Utility and consumer choice TOP: Budget constraintMSC: Analytical

22. Refer to Figure 21-2. Which of the following statements is correct?a. Points W, X, and Y all cost the consumer the same amount of money.b. Point V is unaffordable for the consumer given his budget constraint.c. Point Z costs less than point V.d. Points W, X, and Y give the consumer the same level of satisfaction.



Figure 21-3In each case, the budget constraint moves from BC-1 to BC-2.

BC-1BC-2

(a)

x

y

BC-2BC-1

(b)

x

y

BC-1

BC-2

(c)

x

y

BC-2

BC-1

(d)

x

y

23. Refer to Figure 21-3. Which of the graphs in the figure reflects a decrease in the price of good X only?a. graph ab. graph bc. graph cd. graph d


24. Refer to Figure 21-3. Which of the graphs in the figure reflects an increase in the price of good Y only?a. graph ab. graph bc. graph cd. graph d


25. Refer to Figure 21-3. Which of the graphs in the figure could reflect a decrease in the prices of both goods?a. graph ab. graph bc. graph cd. None of the above is correct.



26. 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. a decrease in the price of Xb. an increase in the price of Yc. a decrease in the price of Yd. More than one of the above could explain this change.



Which of the following could explain the change in the budget line from A to B?a. a simultaneous decrease in the price of X and the price of Yb. an increase in incomec. an increase in income and a decrease in the price of Yd. Both a and b are correct.




Which of the following could explain the change in the budget line from A to B?a. a decrease in income and a decrease in the price of Xb. a decrease in income and an increase in the price of Xc. an increase in income and a decrease in the price of Xd. an increase in income and an increase in the price of X


29. The slope of the budget constraint is determined by thea. relative price of the goods measured on the axes.b. relative price of the goods measured on the axes and the consumer’s income.c. endowment of productive resources.d. preferences of the consumer.

ANS: A DIF: 1 REF: 21-1 NAT: AnalyticLOC: Utility and consumer choice TOP: Budget constraintMSC: Definitional

30. The slope of the budget constraint is all of the following excepta. the relative price of two goods.b. the rate at which a consumer can trade one good for another.c. the marginal rate of substitution.d. constant.

ANS: C DIF: 1 REF: 21-1 NAT: AnalyticLOC: Utility and consumer choice TOP: Budget constraintMSC: Definitional


Figure 21-4

31. Refer to Figure 21-4. In graph (a), if income is equal to $120, the price of good Y isa. $1b. $2c. $3d. $4


32. Refer to Figure 21-4. In graph (a), what is the price of good Y relative to good X (i.e., Py/Px)?a. 1/3b. 1/4c. 3d. 4


33. Refer to Figure 21-4. In graph (b), what is the price of good X relative to good Y (i.e., Px/Py)?a. 2/7b. 3/6c. 7/2d. 7


34. Refer to Figure 21-4. Assume that a consumer faces both budget constraints in graph (a) and graph (b) on two different occasions. If her income has remained constant, what has happened to prices?a. The price of X in graph (a) is higher than the price of X in graph (b).b. The price of Y in graph (a) is higher than the price of Y in graph (b).c. The prices of both X and Y are lower in graph (a).d. None of the above is true.



35. Suppose a consumer spends her income on two goods: music CDs and DVDs. The consumer has $200 to allocate to these two goods, the price of a CD is $10, and the price of a DVD is $20. What is the maximum number of CDs the consumer can purchase?a. 10b. 20c. 40d. 50


36. Suppose a consumer spends her income on two goods: iTunes music downloads and books. The consumer has $100 to allocate to these two goods, the price of a downloaded song is $1, and the price of a book is $20. What is the maximum number of books the consumer can purchase?a. 100b. 20c. 10d. 5


37. Suppose a consumer spends her income on two goods: music CDs and DVDs. The price of a CD is $8, and the price of a DVD is $20. If we graph the budget constraint by placing the quantity of CDs purchased on the horizontal axis, what is the slope of the budget constraint?a. -5.0b. -2.5c. -0.4d. The slope of the budget constraint cannot be determined without knowing the income the consumer

has available to spend on the two goods.


38. Suppose a consumer is currently spending all of her available income on two goods: music CDs and DVDs. If the price of a CD is $9, the price of a DVD is $18, and she is currently consuming 10 CDs and 5 DVDs, what is the consumer's income?a. $90b. $180c. $270d. $360


39. A consumer is currently spending all of her available income on two goods: music CDs and DVDs. At her current consumption bundle she is spending twice as much on CDs as she is on DVDs. If the consumer has $120 of income and is consuming 10 CDs and 2 DVDs, what is the price of a CD?a. $4b. $8c. $12d. $20



40. The following diagram shows a budget constraint for a particular consumer.

If the price of X is $10, what is the price of Y?a. $15b. $25c. $35d. $70



10 20 30 40 50 60 70 80 90 x

10

20

30

40

y

If the price of X is $5, what is the price of Y?a. $2b. $10c. $30d. $300




10 20 30 40 50 60 70 80 90 x

10

20

30

40

y

If the price of X is $5, what is the consumer’s income?a. $2b. $10c. $30d. $300


43. Budget constraints exist for consumers becausea. their utility from consuming goods eventually reaches a maximum level.b. even with unlimited incomes they have to pay for each good they consume.c. they have to pay for goods, and they have limited incomes.d. prices and incomes are inversely related.

ANS: C DIF: 2 REF: 21-1 NAT: AnalyticLOC: Utility and consumer choice TOP: Budget constraintMSC: Interpretive

44. A family on a trip budgets $800 for meals and gasoline. If the price of a meal for the family is $50, how many meals can the family buy if they do not buy any gasoline?a. 8b. 16c. 24d. 32


45. A family on a trip budgets $800 for meals and hotel accommodations. Suppose the price of a meal is $40. In addition, suppose the family could afford a total of 8 nights in a hotel if they don’t buy any meals. How many meals could the family afford if they gave up two nights in the hotel?a. 1b. 2c. 5d. 8


46. If the price of bread is zero, the budget constraint between bread (on the vertical axis) and cheese (on the horizontal axis) woulda. be vertical.b. coincide with the vertical axis.c. coincide with the horizontal axis.d. be horizontal.



Scenario 21-1Suppose the price of hot wings is $10, the price of beer is $1, and the consumer’s income is $50. In addition, suppose the consumer’s budget constraint illustrates hot wings on the horizontal axis and beer on the vertical axis.

47. Refer to Scenario 21-1. If the price of beer doubles to $2, then thea. budget constraint intersects the vertical axis at 25 beers.b. slope of the budget constraint rises to -2.c. budget constraint intersects the vertical axis at 100 beers.d. budget constraint shifts inward in a parallel fashion.


48. Refer to Scenario 21-1. If the consumer's income rises to $60, then the budget line for hot wings and beer woulda. now intersect the horizontal axis at 6 orders of hot wings and the vertical axis at 60 beers.b. not change.c. now intersect the horizontal axis at 4 orders of hot wings and the vertical axis at 16 beers.d. rotate outward along the beer axis.


49. An increase in a consumer's incomea. increases the slope of the consumer's budget constraint.b. has no effect on the slope of the consumer's budget constraint.c. decreases the slope of the consumer's budget constraint.d. has no effect on the consumer's budget constraint.


50. A decrease in a consumer's incomea. increases the slope of the consumer's budget constraint.b. has no effect on the consumer's budget constraint.c. decreases the slope of the consumer's budget constraint.d. has no effect on the slope of the consumer's budget constraint.


51. Mark spends his weekly income on gin and cocktail olives. The price of gin has risen from $7 to $9 per bottle, the price of cocktail olives has fallen from $6 to $5 per jar, and Mark's income has stayed fixed at $46 per week. Since the price changes, Mark has been buying 4 bottles of gin and 2 jars of cocktail olives per week. At the original prices, 4 bottles of gin and 2 jars of cocktail olives would havea. exactly exhausted his income.b. cost more than his income.c. cost less than his income.d. could have maximized his satisfaction given his budget constraint.



52. Mark spends his weekly income on gin and cocktail olives. The price of gin has risen from $7 to $9 per bottle, the price of cocktail olives has fallen from $6 to $5 per jar, and Mark's income has stayed fixed at $46 per week. If you illustrate gin on the vertical axis and cocktail olives on the horizontal axis, then the budget constrainta. is steeper after the price changes.b. is flatter after the price changes.c. is the same after the price changes.d. shifts in a parallel fashion to the old budget constraint after the price changes.


53. Suppose the only two goods that Brett consumes are wine and cheese. When wine sells for $10 a bottle and cheese sell for $10 a pound, he buys 6 bottles of wine and 4 pounds of cheese — spending his entire income of $100. One day the price of wine falls to $5 a bottle and the price of cheese increases to $20 a pound, while his income does not change. The bundle of wine and cheese that he purchased at the old prices now costsa. the same amount at the new prices.b. less than Brett's income at the new prices.c. more than Brett's income at the new prices.d. We do not have enough information to answer the question.


54. Suppose the only two goods that Brett consumes are wine and cheese. When wine sells for $10 a bottle and cheese sell for $10 a pound, he buys 6 bottles of wine and 4 pounds of cheese — spending his entire income of $100. One day the price of wine falls to $5 a bottle, and the price of cheese increases to $20 a pound, while his income does not change. If you illustrate wine on the vertical axis and cheese on the horizontal axis, thena. the slope of Brett's budget has not changed.b. the slope of Brett's budget constraint is flatter at the new prices.c. the slope of Brett's budget constraint is steeper at the new prices.d. Brett's budget constraint has shifted in a parallel fashion to the budget constraint with the old prices.


55. If the relative price of a concert ticket is three times the price of a meal at a good restaurant, then the opportunity cost of a concert ticket can be measured by thea. slope of the budget constraint.b. slope of an indifference curve.c. marginal rate of substitution.d. income effect.



Figure 21-5

A

B

Popcorn

Mt. Dew

56. Refer to Figure 21-5. Suppose a consumer has $100 in income, the price of popcorn is $2, and the value of B is 100. What is the price of Mt. Dew?a. $1b. $2c. $5d. $100


57. Refer to Figure 21-5. Suppose a consumer has $200 in income, the price of popcorn is $1, and the price of Mt. Dew is $2. What is the value of A?a. 200b. 100c. 50d. 25


58. Refer to Figure 21-5. Suppose the price of popcorn is $2, the price of Mt. Dew is $4, the value of A is 30, and the value of B is 15. How much income does the consumer have?a. $120b. $80c. $60d. $30



Figure 21-6

A

B

Books

DVDs

59. Refer to Figure 21-6. Suppose a consumer has $500 in income, the price of a book is $10, and the value of B is 50. What is the price of a DVD?a. $5b. $10c. $50d. $100


60. Refer to Figure 21-6. Suppose a consumer has $200 in income, the price of a book is $5, and the price of a DVD is $10. What is the value of A?a. 40b. 20c. 10d. 2


61. Refer to Figure 21-6. Suppose the price of a book is $15, the price of a DVD is $10, the value of A is 5, and the value of B is 7.5. How much income does the consumer have?a. $150b. $100c. $75d. $37.50


Sec 02 - The Theory of Consumer Choice - Preferences: What the Consumer Wants

MULTIPLE CHOICE

1. An indifference curve illustrates a. a firm’s profits.b. a consumer’s budget.c. a consumer’s preferences.d. the prices of two goods.


ANS: C DIF: 1 REF: 21-2 NAT: AnalyticLOC: Utility and consumer choice TOP: Indifference curvesMSC: Definitional

2. Economists represent a consumer's preferences usinga. demand curves.b. budget constraints.c. indifference curves.d. supply curves.


3. If two bundles of goods give a consumer the same satisfaction, the consumer must bea. on her budget constraint.b. in a position of equilibrium.c. indifferent between the bundles.d. Both a and c are correct.

ANS: C DIF: 2 REF: 21-2 NAT: AnalyticLOC: Utility and consumer choice TOP: Indifference curvesMSC: Interpretive

4. Indifference curves graphically representa. an income level sufficient to allow an individual to achieve a given level of satisfaction.b. the constraints faced by individuals.c. an individual's preferences.d. the relative price of commodities.


5. A consumera. 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..


6. A consumer's preferences provide aa. ranking of the set of bundles that happen to fall on indifference curves.b. relative ranking of bundles that provide more of all goods.c. framework for evaluating market equilibriums.d. complete ranking of all possible consumption bundles.

ANS: D DIF: 1 REF: 21-2 NAT: AnalyticLOC: Utility and consumer choice TOP: Indifference curvesMSC: Definitional


7. If Walter has one hour of leisure time in which to watch a sporting event on television, his preferences are as follows: Walter prefers watching football to watching baseball, but he prefers watching baseball to watching basketball. He is indifferent between watching baseball and watching hockey. Bundle A contains one hour of football and zero hours of all other sports. Bundle B contains one hour of baseball and zero hours of all other sports. Bundle C contains one hour of basketball and zero hours of all other sports. Bundle D contains one hour of hockey and zero hours of all other sports. If we were to graph Walter’s preferences using indifference curves, which of the following bundles would be on the same indifference curve?a. A, B, and C onlyb. B and D onlyc. A and D onlyd. There is no combination of the sports that could be drawn on the same indifference curve.

ANS: B DIF: 1 REF: 21-2 NAT: AnalyticLOC: Utility and consumer choice TOP: Indifference curvesMSC: Definitional

8. Diana and Sarah each like jewelry and music by the Rolling Stones. If we were to graph an indifference curve with jewelry on the horizontal axis and cd’s by the Rolling Stones on the vertical axis, then a. Diana and Sarah would have identical indifference curves.b. Diana’s indifference curve would be higher than Sarah’s indifference curve.c. Sarah’s indifference curve would be higher than Diana’s indifference curve.d. Because we do not know the intensity of each woman’s preferences, we do not have enough

information to compare their indifference curves.

ANS: D DIF: 2 REF: 21-2 NAT: AnalyticLOC: Utility and consumer choice TOP: Indifference curvesMSC: Analytical

9. Both Diana and Sarah like jazz music and music by the Beatles. Diana likes music by the Beatles much better than jazz music, whereas Sarah prefers jazz music to music by the Beatles. If we were to graph an indifference curve with cd’s by the Beatles on the horizontal axis and jazz cd’s on the vertical axis, then a. Diana and Sarah would have identical indifference curves.b. Diana’s indifference curve would be steeper than Sarah’s indifference curve.c. Sarah’s indifference curve would be steeper than Diana’s indifference curve.d. We do not have enough information to compare their indifference curves.

ANS: B DIF: 2 REF: 21-2 NAT: AnalyticLOC: Utility and consumer choice TOP: Indifference curvesMSC: Analytical

10. Alicia is a vegetarian, so she does not eat beef. That is, beef provides no additional utility to Alicia. She loves potatoes, however. If we illustrate Alicia’s indifference curves by drawing beef on the horizontal axis and potatoes on the vertical axis, her indifference curves will a. slope downward.b. be vertical straight lines.c. slope upward.d. be horizontal straight lines.


11. Irene is a vegetarian, so she does not eat pork. That is, pork provides no additional utility to Irene. She loves broccoli, however. If we illustrate Irene’s indifference curves by drawing broccoli on the horizontal axis and pork on the vertical axis, her indifference curves will a. slope downward.b. be vertical straight lines.c. slope upward.d. be horizontal straight lines.



Figure 21-7

D

B

A

C

E

Indifference Curve 1



Cake

Donuts

12. Refer to Figure 21-7. When comparing bundle A to bundle E, the consumer a. prefers bundle A because it contains more donuts.b. prefers bundle E because it lies on a higher indifference curve.c. prefers bundle E because it contains more donuts.d. is indifferent between the two bundles.


13. Refer to Figure 21-7. When comparing bundle B to bundle C, the consumer a. prefers bundle B because it contains more donuts.b. is indifferent between the two bundles.c. prefers bundle C because it contains more cake.d. In order to compare bundle B to bundle C, we must know the prices of cake and donuts.


14. Refer to Figure 21-7. A person that chooses to consume bundle C is likely to a. receive higher total satisfaction at bundle C than at bundle A.b. spend more on bundle C than bundle A.c. receive higher marginal utility from cake than from donuts.d. receive higher marginal utility from donuts than from cake.


15. Refer to Figure 21-7. Which of the following statements is correct?a. Bundle A is preferred equally to bundle E.b. Bundle A is preferred equally to bundle C.c. Bundle B contains more cake than bundle C.d. The bundles along indifference curve Indifference Curve 2 are preferred to those along indifference

curve Indifference Curve 3.



16. Refer to Figure 21-7. Which of the following statements is correct?a. If a consumer moves from bundle C to bundle A, her loss of cake cannot be compensated for by an

increase in donuts.b. Bundle E is preferred to all other points identified in the figure.c. Since more is preferred to less, bundle C may be preferred to bundle E in some circumstances for

this consumer.d. Even though bundle E has more of both goods than bundle B, we could draw a different set of

indifference curves in which bundle B is preferred to bundle E.


17. Refer to Figure 21-7. Which of the following statements is not true for a consumer who moves from bundle B to bundle C?a. At bundle C the consumer would be willing to give up a larger amount of cake in exchange for a

donut than at bundle B.b. The marginal rate of substitution at bundles B and C are the same since the points lie on the same

indifference curve.c. The consumer is willing to sacrifice donuts to obtain cake.d. The consumer receives the same level of satisfaction at bundles B and C.


18. Refer to Figure 21-7. Which of the following statements is not correct?a. Bundles on Indifference Curve 3 are preferred to bundles on Indifference Curve 1.b. The consumer is indifferent between bundles A and E because they contain the same number of

donuts.c. The consumer is indifference between bundles B and C.d. The consumer prefers bundle C to bundle D.


19. Refer to Figure 21-7. Which of the following comparisons is correct regarding the marginal rate of substitution (MRS) of donuts for cake?a. The MRS is greater between bundles A and B than between bundles B and C.b. The MRS is greater between bundles B and C than between bundles A and B.c. The MRS is the same between bundles A and B and bundles B and C because all three bundles lie

on the same indifference curve.d. The MRS is greater between bundles E and B than between bundles B and D.

ANS: A DIF: 3 REF: 21-2 NAT: AnalyticLOC: Utility and consumer choice TOP: Marginal rate of substitutionMSC: Analytical

20. Each of the following are characteristics of an indifference curve map excepta. moving northeast to a new indifference curve will increase utility.b. points on the same indifference curve yield equal utility.c. the axes represent levels of utility for each of the goods.d. indifference curves cannot cross.

ANS: C DIF: 2 REF: 21-2 NAT: AnalyticLOC: Utility and consumer choice TOP: Indifference curvesMSC: Applicative


21. Bundle A contains 10 units of good X and 5 units of good Y. Bundle B contains 5 units of good X and 10 units of good Y. Bundle C contains 10 units of good X and 10 units of good Y. The consumer is indifferent between bundle A and bundle B. Assume that the consumer’s preferences satisfy the four properties of indifference curves. Which of the following statements is correct?a. The consumer must prefer bundle C to either bundle A or B.b. Bundle A and bundle B lie on the same indifference curve.c. The consumer must prefer bundle B to bundle C.d. Both a) and b) are correct.

ANS: D DIF: 2 REF: 21-2 NAT: AnalyticLOC: Utility and consumer choice TOP: Indifference curvesMSC: Applicative

22. A consumer has preferences over two goods: books and movies. The two bundles shown in the table below lie on the same indifference curve for the consumer.

Bundle Books MoviesA 2 3B 3 2

Which of the following bundles could not lie on the same indifference curve with A and B and satisfy the four properties of indifference curves?

a. 1 movie and 5 booksb. 3 movies and 3 booksc. 5 movies and 1 bookd. 1 movie and 7 books


23. A consumer has preferences over two goods: books and movies. The three bundles shown in the table below lie on the same indifference curve for the consumer.

Bundle Books MoviesA 2 4B 4 2C 3 3

Which of the following properties of indifference curves would this consumer's preferences violate?a. Indifference curves are downward sloping.b. Indifference curves do not cross.c. Indifference curves are bowed inward.d. These bundles do not violate any of the properties of indifference curves.

ANS: C DIF: 3 REF: 21-2 NAT: AnalyticLOC: Utility and consumer choice TOP: Indifference curvesMSC: Analytical

24. Laura consumes only beer and chips. Her indifference curves are all bowed inward. Consider the bundles (2,6), (4,4), and (6,2). If Laura is indifferent between (2,6) and (6,2), then Laura musta. prefer (4,4) to (6,2).b. be indifferent between (4,4) and (6,2).c. prefer (6,2) to (4,4).d. prefer (2,6) to (4,4).

ANS: A DIF: 2 REF: 21-2 NAT: AnalyticLOC: Utility and consumer choice TOP: Indifference curvesMSC: Analytical


25. Which of the following is a property of indifference curves?a. Indifference curves usually intersect.b. Indifference curves have positive slopes.c. Indifference curves are downward sloping and always linear.d. Indifference curves are bowed in toward the origin.

ANS: D DIF: 1 REF: 21-2 NAT: AnalyticLOC: Utility and consumer choice TOP: Indifference curvesMSC: Interpretive

26. All of the following are properties of indifference curves excepta. higher indifference curves are preferred to lower ones.b. indifference curves are downward sloping.c. indifference curves do not cross.d. indifference curves are bowed outward.


27. Which of the following is a property of a typical indifference curve? a. upward slopingb. bowed away from the originc. do not intersectd. lower ones are preferred to higher ones


28. Which of the following is a property of a typical indifference curve? a. upward slopingb. bowed away from the originc. they often intersectd. higher ones are preferred to lower ones


29. Which of the following is not a property of a typical indifference curve? a. downward slopingb. bowed away from the originc. do not intersectd. higher ones are preferred to lower ones

ANS: B DIF: 1 REF: 21-2 NAT: AnalyticLOC: Utility and consumer choice TOP: Indifference curvesMSC: Interpretive

30. Higher indifference curves are preferred to lower ones as long as thea. marginal rate of substitution is diminishing.b. products in the bundle are “bads” not “goods.”c. products in the bundle are “goods” not “bads.”d. budget constraint does not shift.



31. Janet prefers cashews to almonds. She prefers macadamia nuts to peanuts, but she is indifferent between almonds and peanuts. Which of the following statements can we say for sure?a. Janet prefers cashews to macadamia nuts.b. Janet prefers peanuts to cashews.c. Janet prefers macadamia nuts to almonds.d. Janet prefers almonds to macadamia nuts.

ANS: C DIF: 2 REF: 21-2 NAT: AnalyticLOC: Utility and consumer choice TOP: Transitivity MSC: Applicative

32. Indifference curves that cross would suggest thata. the consumer does not prefer more to less.b. the consumer is likely to prefer a redistribution of income from rich to poor.c. different individuals have different preferences for the same goods.d. the marginal rate of substitution is the same for both indifference curves.

ANS: A DIF: 2 REF: 21-2 NAT: AnalyticLOC: Utility and consumer choice TOP: Transitivity MSC: Analytical

33. Which of the following is not correct? a. Indifference curves are downward sloping.b. Indifference curves that are closer to the origin are preferred to indifference curves that are further

from the origin.c. Indifference curves are bowed in toward the origin.d. Indifference curves do not cross.

ANS: B DIF: 2 REF: 21-2 NAT: AnalyticLOC: Utility and consumer choice TOP: Indifference curvesMSC: Interpretive

34. When indifference curves are bowed in toward the origin, a. consumers are less inclined to trade away goods they are lacking.b. consumers' willingness to trade away goods they have in abundance diminishes.c. an increase in income will shift the indifference curve away from the origin.d. a decrease in income will shift the indifference curve away from the origin.

ANS: A DIF: 2 REF: 21-2 NAT: AnalyticLOC: Utility and consumer choice TOP: Indifference curvesMSC: Analytical

35. Indifference curves tend to be bowed inward because of diminishinga. marginal rates of substitution.b. demand for the good as prices rise.c. income.d. Both a and b are correct.

ANS: A DIF: 2 REF: 21-2 NAT: AnalyticLOC: Utility and consumer choice TOP: Marginal rate of substitutionMSC: Interpretive

36. The slope of an indifference curve isa. the rate of change of consumer's preferences.b. the marginal rate of preference.c. the marginal rate of substitution.d. always equal to the slope of the budget constraint.

ANS: C DIF: 1 REF: 21-2 NAT: AnalyticLOC: Utility and consumer choice TOP: Marginal rate of substitutionMSC: Definitional


37. The rate at which a consumer is willing to exchange one good for another, and maintain a constant level of satisfaction, is called thea. relative expenditure ratio.b. value of marginal product.c. marginal rate of substitution.d. relative price ratio.


38. The marginal rate of substitution isa. the slope of a budget constraint.b. always constant.c. the slope of an indifference curve.d. the point at which the budget constraint and the indifference curve are tangent.


39. The rate at which a consumer is willing to trade one good for another to maintain the same level of satisfaction is affected by the a. prices of the products.b. amount of each good the consumer is currently consuming.c. consumer’s income.d. marginal value product.

ANS: B DIF: 2 REF: 21-2 NAT: AnalyticLOC: Utility and consumer choice TOP: Marginal rate of substitutionMSC: Analytical

40. Bob enjoys fishing and hunting. He divides his leisure hours between the two outdoor activities. Suppose we were to draw Bob’s indifference curves for the two activities, placing fishing on the horizontal axis and hunting on the vertical axis. If Bob’s indifference curves are bowed inward, then a. the rate at which he is willing to give up an hour of hunting for an hour of fishing changes

depending on how many hours of each activity he has done. For example, if Bob has already fished a lot in one week, he will be more willing to give up an hour of fishing for an hour of hunting than if he has only fished a little that week.

b. the rate at which he is willing to give up an hour of hunting for an hour of fishing is constant because he must derive the same enjoyment out of each activity.

c. the rate at which he is willing to give up an hour of hunting for an hour of fishing changes depending on how many hours of each activity he has done. For example, if Bob has already fished a lot in one week, he will be less willing to give up an hour of fishing for an hour of hunting than if he has only fished a little that week.

d. Bob’s indifference curves will not cross. When indifference curves are bowed outward, the indifference curves must cross.


41. The marginal rate of substitution a. varies along an indifference curve if the curve is bowed inward.b. is constant along an indifference curve if the curve is a straight line.c. is greater when a consumer has more of two goods rather than less of two goods.d. Both a and b are correct.

ANS: D DIF: 2 REF: 21-2 NAT: AnalyticLOC: Utility and consumer choice TOP: Marginal rate of substitutionMSC: Analytical


42. Bundle L contains 10 units of good X and 20 units of good Y. Bundle M contains 8 units of good X and 21 units of good Y. The consumer is indifferent between bundle L and bundle M. Assume that the consumer’s preferences satisfy the four properties of indifference curves. Which of the following correctly expresses the marginal rate of substitution of good X for good Y between these two points?a. The consumer will give up 1 unit of good X to gain 2 units of good Y.b. The consumer will give up 2 units of good X to gain 1 unit of good Y.c. The price of good X is twice as large as the price of good Y.d. The price of good X is half as large as the price of good Y.

ANS: B DIF: 2 REF: 21-2 NAT: AnalyticLOC: Utility and consumer choice TOP: Marginal rate of substitutionMSC: Applicative

43. Assume that a consumer’s indifference curve is bowed inward and satisfies the other three properties of indifference curves. As the consumer moves from left to right along the horizontal axis, the consumer’s marginal rate of substitution a. increases.b. decreases.c. remains constant.d. increases, then decreases.


44. Assume that a consumer’s indifference curve is bowed outward but satisfies the other three properties of indifference curves. As the consumer moves from left to right along the horizontal axis, the consumer’s marginal rate of substitution a. increases.b. decreases.c. remains constant.d. increases, then decreases.


45. Assume that a consumer’s indifference curve is a downward-sloping straight line. As the consumer moves from left to right along the horizontal axis, the consumer’s marginal rate of substitution a. increases.b. decreases.c. remains constant.d. increases, then decreases.

ANS: C DIF: 2 REF: 21-2 NAT: AnalyticLOC: Utility and consumer choice TOP: Marginal rate of substitutionMSC: Analytical

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

ANS: D DIF: 1 REF: 21-2 NAT: AnalyticLOC: Utility and consumer choice TOP: Marginal rate of substitutionMSC: Interpretive

47. As long as a consumer remains on the same indifference curve,a. she is indifferent to all points that lie on any other indifference curve.b. her preferences will not affect the marginal rate of substitution.c. she is unable to decide which bundle of goods to choose.d. she is indifferent among the points on that curve.


ANS: D DIF: 1 REF: 21-2 NAT: AnalyticLOC: Utility and consumer choice TOP: Marginal rate of substitutionMSC: Interpretive

48. The bowed shape of the indifference curve reflects the consumer'sa. unwillingness to give up a good that he already has in large quantity.b. unwillingness to purchase a good that he already has in large quantity.c. greater willingness to give up a good that he already has in large quantity.d. greater willingness to purchase a good that he already has in large quantity.


49. 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?a. 2/5b. 1c. 5/2d. 3



50. 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?a. 1/2b. 4/3c. 2d. 3

ANS: C DIF: 2 REF: 21-2 NAT: AnalyticLOC: Utility and consumer choice TOP: Marginal rate of substitutionMSC: Analytical

Figure 21-8(a)

x

y (b)

x

y (c)

x

y

51. Refer to Figure 21-8. Which of the graphs shown may represent indifference curves?a. graph ab. graph bc. graph cd. All of the above are correct.


52. Refer to Figure 21-8. Which of the graphs shown represent indifference curves for perfect complements?a. graph ab. graph bc. graph cd. All of the above are correct.

ANS: B DIF: 1 REF: 21-2 NAT: AnalyticLOC: Utility and consumer choice TOP: Perfect complementsMSC: Interpretive


53. Refer to Figure 21-8. Which of the graphs shown represent indifference curves for perfect substitutes?a. graph ab. graph bc. graph cd. All of the above are correct.

ANS: A DIF: 1 REF: 21-2 NAT: AnalyticLOC: Utility and consumer choice TOP: Perfect substitutesMSC: Interpretive

54. Refer to Figure 21-8. Which of the following statements is correct?a. The indifference curves represented in graph a are perfect complements.b. The indifference curves represented in graph b are perfect substitutes.c. The indifference curves represented in graph c are neither perfect substitutes not perfect

complements.d. All of the above are correct.

ANS: C DIF: 2 REF: 21-2 NAT: AnalyticLOC: Utility and consumer choice TOP: Perfect substitutes | Perfect complementsMSC: Interpretive

55. Refer to Figure 21-8. Which of the following statements is correct?a. The indifference curves represented in graph a are perfect substitutes.b. The indifference curves represented in graph b are perfect complements.c. The indifference curves represented in graph c are neither perfect substitutes not perfect

complements.d. All of the above are correct.

ANS: D DIF: 2 REF: 21-2 NAT: AnalyticLOC: Utility and consumer choice TOP: Perfect substitutes | Perfect complementsMSC: Interpretive

56. When two goods are perfect substitutes, the marginal rate of substitutiona. is constant along the indifference curve.b. decreases as the scarcity of one good increases.c. increases as the scarcity of one good increases.d. changes to reflect the consumer’s changing preferences for the goods.

ANS: A DIF: 1 REF: 21-2 NAT: AnalyticLOC: Utility and consumer choice TOP: Perfect substitutesMSC: Interpretive

57. Consider the indifference curve map for nickels and quarters. Assume nickels are on the vertical axis and quarters are on the horizontal axis. The indifference curves for nickels and quarters are a. straight lines with slope of -1/5b. straight lines with a slope of -1.c. straight lines with a slope of -5.d. L shaped.

ANS: C DIF: 2 REF: 21-2 NAT: AnalyticLOC: Utility and consumer choice TOP: Perfect substitutesMSC: Applicative

58. A consumer’s preferences for $1 bills and $20 bills can be represented by indifference curves that area. bowed out from the originb. bowed in toward the originc. straight linesd. right angles

ANS: C DIF: 1 REF: 21-2 NAT: AnalyticLOC: Utility and consumer choice TOP: Perfect substitutesMSC: Interpretive


59. When two goods are perfect substitutes, the indifference curve is a. a horizontal straight line.b. bowed outward.c. a downward-sloping straight line.d. a right angle.

ANS: C DIF: 2 REF: 21-2 NAT: AnalyticLOC: Utility and consumer choice TOP: Perfect substitutesMSC: Applicative

60. When two goods are perfect substitutes, the a. indifference curve is a horizontal straight line.b. marginal rate of substitution is constant.c. indifference curve is a vertical straight line.d. Both a and b are correct.

ANS: B DIF: 2 REF: 21-2 NAT: AnalyticLOC: Utility and consumer choice TOP: Perfect substitutesMSC: Applicative

61. When two goods are perfect substitutes, the a. indifference curve is a downward-sloping straight line.b. marginal rate of substitution is constant.c. indifference curve is a vertical straight line.d. Both a and b are correct.

ANS: D DIF: 2 REF: 21-2 NAT: AnalyticLOC: Utility and consumer choice TOP: Perfect substitutesMSC: Applicative


62. Suppose Caroline is indifferent between tea and coffee as long as she consumes an equivalent amount of caffeine. Suppose that coffee has twice as much caffeine as tea. Which graph would illustrate a representative indifference curve? a.

1 2 3 4 5 6 7 8 9 Coffee

123456789

Tea

b.

1 2 3 4 5 6 7 8 9 Coffee

123456789

Tea

c.

1 2 3 4 5 6 7 8 9 Coffee

123456789

Tea

d.

1 2 3 4 5 6 7 8 9 Coffee

123456789

Tea

ANS: B DIF: 3 REF: 21-2 NAT: AnalyticLOC: Utility and consumer choice TOP: Perfect substitutesMSC: Applicative

63. A set of indifference curves that are only slightly bowed inward represent goods that could best be described asa. perfect substitutes.b. perfect complements.c. very close substitutes.d. very close complements.

ANS: C DIF: 2 REF: 21-2 NAT: AnalyticLOC: Utility and consumer choice TOP: Indifference curvesMSC: Analytical

64. When two goods are perfect complements, the indifference curve is a. a horizontal straight line.b. bowed outward.c. a downward-sloping straight line.d. a right angle.


ANS: D DIF: 2 REF: 21-2 NAT: AnalyticLOC: Utility and consumer choice TOP: Perfect complementsMSC: Applicative

65. A consumer’s preferences for right shoes and left shoes can be represented by indifference curves that area. bowed out from the originb. bowed in toward the originc. straight linesd. right angles

ANS: D DIF: 1 REF: 21-2 NAT: AnalyticLOC: Utility and consumer choice TOP: Perfect complementsMSC: Interpretive

66. When two goods are perfect complements, the indifference curves willa. have a positive slope.b. be right angles.c. have a constant marginal rate of substitution.d. Both b and c are correct.

ANS: B DIF: 2 REF: 21-2 NAT: AnalyticLOC: Utility and consumer choice TOP: Perfect complementsMSC: Interpretive

67. "Left" gloves and "right" gloves provide a good example ofa. perfect substitutes.b. perfect complements.c. negatively sloped indifference curves.d. positively sloped indifference curves.

ANS: B DIF: 2 REF: 21-2 NAT: AnalyticLOC: Utility and consumer choice TOP: Perfect complementsMSC: Analytical

68. When two goods are perfect complements, the indifference curves area. positively sloped.b. negatively sloped.c. straight lines.d. right angles.

ANS: D DIF: 1 REF: 21-2 NAT: AnalyticLOC: Utility and consumer choice TOP: Perfect complementsMSC: Interpretive

69. Suppose Rich always uses two packets of sugar with his coffee. Rich's indifference curves for sugar and coffee area. bowed inward.b. bowed outward.c. straight lines.d. L shaped.

ANS: D DIF: 2 REF: 21-2 NAT: AnalyticLOC: Utility and consumer choice TOP: Perfect complementsMSC: Applicative

70. A consumer has preferences over two goods: pizza and beer. The four bundles shown in the table below lie on the same indifference curve for the consumer.

Bundle Pizza BeerA 2 8B 2 2C 9 2D 6 2


Which of the following statements regarding these bundles is correct?a. The goods are perfect substitutes for this consumer.b. The goods are perfect complements for this consumer.c. These bundles violate the property that indifference curves are bowed inward.d. These bundles violate the property that indifference curves do not cross.

ANS: B DIF: 3 REF: 21-2 NAT: AnalyticLOC: Utility and consumer choice TOP: Perfect complementsMSC: Analytical

Sec 03 - The Theory of Consumer Choice - Optimization: What the Consumer Chooses

MULTIPLE CHOICE

1. The goal of the consumer is toa. maximize utility.b. be on the highest indifference curve.c. maximize satisfaction.d. All of the above are the goals of the consumer.

ANS: D DIF: 1 REF: 21-3 NAT: AnalyticLOC: Utility and consumer choice TOP: OptimizationMSC: Interpretive

2. The goal of the consumer is toa. maximize utility.b. minimize expenses.c. spend more income in the current time period than in the future.d. All of the above are the goals of the consumer.

ANS: A DIF: 2 REF: 21-3 NAT: AnalyticLOC: Utility and consumer choice TOP: OptimizationMSC: Interpretive

3. When a consumer is purchasing the best combination of two goods, X and Y, subject to a budget constraint, we say that the consumer is at an optimal choice point. A graph of an optimal choice point shows that it occurs a. along the highest attainable indifference curve.b. where the indifference curve is tangent to the budget constraint.c. where the marginal utility per dollar spent is the same for both X and Y.d. All of the above are correct.

ANS: D DIF: 2 REF: 21-3 NAT: AnalyticLOC: Utility and consumer choice TOP: OptimizationMSC: Analytical

4. When a consumer is purchasing the best combination of two goods, X and Y, subject to a budget constraint, we say that the consumer is at an optimal choice point. A graph of an optimal choice point shows that it occurs a. along the highest indifference curve.b. along the lowest budget constraint.c. where the indifference curve is tangent to the budget constraint.d. All of the above are correct.

ANS: C DIF: 2 REF: 21-3 NAT: AnalyticLOC: Utility and consumer choice TOP: OptimizationMSC: Analytical

5. A consumer chooses an optimal consumption point where the a. marginal rate of substitution equals the relative price ratio.b. slope of the indifference curve equals the slope of the budget constraint.c. ratio of the marginal utilities equals the ratio of the prices.d. All of the above are correct.



6. A consumer chooses an optimal consumption point where the a. marginal rate of substitution is maximized.b. slope of the indifference curve exceeds the slope of the budget constraint by the greatest amount.c. ratio of the marginal utilities equals the ratio of the prices.d. All of the above are correct.

ANS: C DIF: 2 REF: 21-3 NAT: AnalyticLOC: Utility and consumer choice TOP: OptimizationMSC: Interpretive

7. Carlos goes to the movies every Sunday afternoon. The movie theater offers 4 combinations of popcorn and beverages: the “mini-combo” costs $5 and includes a small popcorn and a small drink, the “medium-combo” costs $7 and includes a medium popcorn and a medium drink, the “value-combo” also costs $7 and includes a small popcorn and a large drink, and the “large-combo” costs $9 and includes a large popcorn and a large drink. Carlos always purchases the “value-combo.” We can conclude that a. Carlos cannot afford the “large-combo.”b. Carlos cannot afford the “medium-combo.”c. Carlos prefers a combo with a larger popcorn-to-beverage ratio.d. Carlos prefers a combo with a smaller popcorn-to-beverage ratio.


8. Which of the following equations corresponds to an optimal choice point?(i) MRS = PX/PY

(ii) MUX/MUY = PX/PY

(iii) MUX/PX = MUY/PY

(iv) MUX/PY = MUY/PX

a. (i) onlyb. (i), (ii), and (iii) onlyc. (ii) and (iv) only d. (i), (ii), (iii), and (iv)

ANS: B DIF: 2 REF: 21-3 NAT: AnalyticLOC: Utility and consumer choice TOP: OptimizationMSC: Analytical

9. Bundle J contains 10 units of good X and 5 units of good Y. Bundle K contains 5 units of good X and 10 units of good Y. Bundle L contains 10 units of good X and 10 units of good Y. Assume that the consumer’s preferences satisfy the four properties of indifference curves. The price of X is $1, the price of Y is $2, and the consumer has an income of $20. Which bundle will the consumer choose?a. bundle Jb. bundle Kc. bundle Ld. either bundle J or bundle K

ANS: A DIF: 2 REF: 21-3 NAT: AnalyticLOC: Utility and consumer choice TOP: OptimizationMSC: Applicative

10. A consumer chooses an optimal consumption point where the a. marginal rate of substitution is maximized.b. rate at which the consumer is willing to trade one good for another equals the price ratio.c. price ratio is minimized.d. All of the above are correct.


ANS: B DIF: 2 REF: 21-3 NAT: AnalyticLOC: Utility and consumer choice TOP: OptimizationMSC: Interpretive

11. When considering her budget, the highest indifference curve that a consumer can reach is thea. one that is tangent to the budget constraint.b. indifference curve farthest from the originc. indifference curve that intersects the budget constraint in at least two places.d. None of the above is correct.


12. The relationship between the marginal utility that Wendy gets from eating hamburgers and the number of hamburgers she eats per month is as follows:

Hamburgers 1 2 3 4 5 6Marginal Utility 20 16 12 8 4 0

Wendy receives 3 units of utility from the last dollar spent on each of the other goods she consumes. If hamburgers cost $4 each, how many hamburgers will she consume per month if she maximizes utility?

a. 2b. 3c. 4d. 5

ANS: B DIF: 3 REF: 21-3 NAT: AnalyticLOC: Utility and consumer choice TOP: OptimizationMSC: Applicative

13. Wilbur consumes two goods, bacon and eggs. He has maximized his utility given his income. Eggs costs $2 per dozen, and he consumes them to the point where the marginal utility he receives is 6. Bacon cost $4 per serving, and the relationship between the marginal utility that Wilbur gets from eating bacon and the number of servings he eats per month is as follows:

Servings of Bacon 1 2 3 4 5 6Marginal Utility 20 16 12 8 4 0

How many servings of bacon does Wilbur buy each month?a. 1b. 2c. 3d. 4

ANS: C DIF: 3 REF: 21-3 NAT: AnalyticLOC: Utility and consumer choice TOP: OptimizationMSC: Applicative

14. An optimizing consumer will select a consumption bundle in whicha. income is maximized, and prices are minimized.b. utility is maximized, and prices are minimized.c. utility is maximized, subject to budget constraints.d. utility is maximized, and indifference curves are linear.



15. If the consumer's income and all prices simultaneously double, then the optimum consumption bundle will a. shift outward relative to the old optimum.b. move leftward along the old budget constraint.c. not change.d. shift inward relative to the old optimum.


16. If the consumer's income and all prices simultaneously decrease by one-half, then the optimum consumption will a. shift outward relative to the old optimum.b. move leftward along the old budget constraint.c. shift inward relative to the old optimum.d. not change.

ANS: D DIF: 3 REF: 21-3 NAT: AnalyticLOC: Utility and consumer choice TOP: OptimizationMSC: Applicative

17. The consumer's optimum choice is represented bya. MUx/MUy = Px/Py.b. MUx/Px = MUy/Py.c. MRSxy = Px/Py.d. All of the above are correct.


18. An optimizing consumer will select the consumption bundle in which thea. ratio of total utilities is equal to the relative price ratio.b. ratio of income to price equals the marginal rate of substitution.c. marginal rate of substitution is equal to the relative price ratio of the goods.d. marginal rate of substitution is equal to marginal utility.


19. When the indifference curve is tangent to the budget constraint,a. a consumer cannot be made better off without increasing her income.b. the consumer is likely to be at a sub-optimal level of consumption.c. income is at its optimum for a consumer.d. indifference curves are likely to intersect.


20. At the consumer's optimuma. the budget constraint will have a slope of MUx/Px.b. it is still possible for the consumer to increase his consumption of both goods.c. the indifference curve will intersect the budget constraint at the midpoint of the budget constraint.d. the slope of the indifference curve is equal to the slope of the budget constraint.



21. At the consumer's optimuma. the budget constraint will have a slope of MUx/Px.b. the slope of the indifference curve is equal to the slope of the budget constraint.c. the indifference curve will intersect the budget constraint at the midpoint of the budget constraint.d. Both b and c are correct.


Figure 21-9

22. Refer to Figure 21-9. Given the budget constraint depicted in the graph, the consumer will choose bundle a. B.b. C.c. D.d. E.


23. Refer to Figure 21-9. It would be possible for the consumer to reach I2 ifa. the price of Y decreases.b. the price of X decreases.c. income increases.d. All of the above would be correct.


24. Refer to Figure 21-9. Bundle B represents a point where a. MRSxy > Py/Px.b. MRSxy = Px/Py.c. MRSxy < Px/Py.d. MRSxy > Px/Py.



25. Refer to Figure 21-9. Bundle C represents a point where a. MRSxy > Py/Px.b. MRSxy = Px/Py.c. MRSxy < Px/Py.d. MRSxy > Px/Py.


26. Refer to Figure 21-9. Bundle D represents a point where a. MRSxy > Py/Px.b. MRSxy = Px/Py.c. MRSxy < Px/Py.d. MRSxy < Py/Px.


27. The consumer's optimum is wherea. MUx/MUy = Py/Px.b. MUx/Py = MUy/Px.c. Px/MUx = Py/MUy.d. MUx/MUy = Px/Py.

ANS: D DIF: 2 REF: 21-3 NAT: AnalyticLOC: Utility and consumer choice TOP: OptimizationMSC: Definitional

Figure 21-10

28. Refer to Figure 21-10. Assume that the consumer depicted in the figure has an income of $20. The price of Skittles is $2 and the price of M&M's is $4. This consumer will choose a consumption bundle where the marginal rate of substitution isa. 2.b. 2/3.c. 1/2.d. 1/3.

ANS: C DIF: 2 REF: 21-3 NAT: AnalyticLOC: Utility and consumer choice TOP: Marginal rate of substitutionMSC: Applicative


29. Refer to Figure 21-10. Assume that the consumer depicted in the figure has an income of $20. The price of Skittles is $2 and the price of M&M's is $4. This consumer will choose consumption bundle a. A.b. B.c. C.d. D.

ANS: A DIF: 2 REF: 21-3 NAT: AnalyticLOC: Utility and consumer choice TOP: OptimizationMSC: Applicative

30. Refer to Figure 21-10. Assume that the consumer depicted in the figure has an income of $50. The price of Skittles is $5 and the price of M&M's is $5. This consumer will choose a consumption bundle where the marginal rate of substitution isa. 10.b. 5.c. 1.d. 1/5.

ANS: C DIF: 2 REF: 21-3 NAT: AnalyticLOC: Utility and consumer choice TOP: Marginal rate of substitutionMSC: Applicative

31. Refer to Figure 21-10. Assume that the consumer depicted in the figure has an income of $20. The price of Skittles is $2 and the price of M&M's is $2. This consumer will choose to optimize by purchasing bundle a. A.b. B.c. C.d. D.


32. Refer to Figure 21-10. Assume that the consumer depicted in the figure faces prices and income such that she optimizes at point B. According to the graph, which of the following would cause the consumer to move to point A?a. a decrease in the price of Skittlesb. a decrease in the price of M&M'sc. an increase in the price of Skittlesd. an increase in the price of M&M's



Figure 21-11

33. Refer to Figure 21-11. Assume that the consumer depicted in the figure has an income of $40, the price of a bag of marshmallows is $2, and the price of a bag of chocolate chips is $2. The optimizing consumer will choose to purchase which bundle of marshmallows and chocolate chips?a. Ab. Bc. Cd. D


34. Refer to Figure 21-11. Assume that the consumer depicted in the figure has an income of $100 and currently optimizes at bundle A. When the price of marshmallows decreases to $5, which bundle will the optimizing consumer choose?a. Ab. Bc. Cd. D


35. Refer to Figure 21-11. Assume that the consumer depicted in the figure has an income of $40. If the price of chocolate chips is $4 and the price of marshmallows is $4, the optimizing consumer would choose to purchasea. 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.


36. Refer to Figure 21-11. Assume that the consumer depicted in the figure 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 purchasea. 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.



37. Refer to Figure 21-11. Assume that the consumer depicted in the figure has an income of $40. Based on the information available in the graph, which of the following price-quantity combinations would be on her demand curve for marshmallows if the price of chocolate chips is $4?a. P=$2, Q=3b. P=$2, Q=9c. P=$4, Q=3d. P=$4, Q=9


38. Refer to Figure 21-11. Assume that the consumer depicted the figure has an income of $50. Based on the information available in the graph, which of the following price-quantity combinations would be on her demand curve for marshmallows if the price of chocolate chips is $2.50?a. P=$2.50, Q=6b. P=$2.50, Q=10c. P=$5.00, Q=3d. P=$5.00, Q=5


39. Which of the following represents a consumer's optimum?a. MUx/MUy = Py/Px

b. MUx/Py = MUy/Px

c. MUx/Px = MUy/Py

d. MUy/MUx = Px/Py


40. A consumer has preferences over two goods, X and Y. Suppose we graph this consumer's preferences (which satisfy the usual properties of indifference curves) and budget constraint on a diagram with X on the horizontal axis and Y on the vertical axis. At the consumer's current consumption bundle, the consumer is spending all available income, and the marginal rate of substitution is greater than the slope of the budget constraint. We can conclude that the consumer a. is currently maximizing satisfaction.b. could increase satisfaction by consuming more X and less Y.c. could increase satisfaction by consuming less X and more Y.d. could purchase more X and more Y and increase total satisfaction.


41. A consumer has preferences over two goods, X and Y. Suppose we graph this consumer's preferences (which satisfy the usual properties of indifference curves) and budget constraint on a diagram with X on the horizontal axis and Y on the vertical axis. At the consumer's current consumption bundle, the consumer is spending all available income, and the marginal rate of substitution is less than the slope of the budget constraint. We can conclude that the consumer a. is currently maximizing satisfaction.b. could increase satisfaction by consuming more X and less Y.c. could increase satisfaction by consuming less X and more Y.d. could purchase more X and more Y and increase total satisfaction.



42. Suppose a consumer has preferences over two goods, X and Y, which are perfect substitutes. In particular, two units of X is equivalent to one unit of Y. If the price of X is $1, the price of Y is $3, and the consumer has $30 of income to allocate to these two goods, how much of each good should the consumer purchase to maximize satisfaction?a. 30 units of X and 0 units of Yb. 0 units of X and 10 units of Yc. 15 units of X and 5 units of Yd. 12 units of X and 6 units of Y

ANS: A DIF: 3 REF: 21-3 NAT: AnalyticLOC: Utility and consumer choice TOP: OptimizationMSC: Analytical

43. Ken consumes two goods, Sprite and potato chips. Sprite costs $2 per can, and he consumes it to the point where the marginal utility he receives from his last Sprite is 4. Potato chips cost $3 per bag, and the relationship between the marginal utility he gets from eating a bag of potato chips and the number of bags he eats per month is as follows:

Bags of potato chips 1 2 3 4 5 6Marginal utility 30 20 12 6 2 0

If Ken is maximizing his utility, how many bags of potato chips does he buy each month?a. 2b. 3c. 4d. 5




If Ken is maximizing his utility, how many bags of potato chips does he buy each month?a. 2b. 3c. 4d. 5





If Ken is maximizing his utility, how much does he spend on potato chips each month?a. $2b. $6c. $8d. $12


46. Jeffrey spends all of his income on warm-up suits and running shoes, and the price of a pair of shoes is four times the price of a warm-up suit. In order to maximize total utility, Jeffrey shoulda. buy four times as many warm-up suits as pairs of running shoes.b. buy four times as many pairs of running shoes as warm-up suits.c. buy both items until the marginal utility of a pair of running shoes is four times the marginal utility

of a warm-up suit.d. buy both items until the marginal utility of a warm-up suit is four times the marginal utility of a pair

of running shoes.


47. Amy spends all of her income on jewelry and jeans, and the price of a pair of jeans is three times the price of jewelry. In order to maximize total utility, Amy shoulda. buy three times as much jewelry as pairs of jeans.b. buy three times as many pairs of jeans as jewelry.c. buy both items until the marginal utility of jewelry is three times the marginal utility of a pair of

jeans.d. buy both items until the marginal utility of a pair of jeans is three times the marginal utility of

jewelry.


48. Jane is maximizing total utility while consuming food and clothing. Her marginal utility from food is 50, and her marginal utility from clothing is 25. If clothing is priced at $10 per unit, the price of food per unit must bea. $2.b. $2.50.c. $5.d. $20.

ANS: D DIF: 2 REF: 21-3 NAT: AnalyticLOC: Utility and consumer choice TOP: OptimizationMSC: Applicative

49. Suppose at the consumer’s current consumption bundle the marginal rate of substitution of cheese for wine is 1/2 bottle of wine per pound of cheese. The price of one pound of cheese is $6, and the price of a bottle of wine is $10. The consumer should increase his consumption of a. cheese, decrease his consumption of wine, and move to a lower indifference curve.b. cheese, decrease his consumption of wine, and move to a higher indifference curve.c. wine, decrease consumption of cheese, and move to a higher indifference curve.d. cheese, decrease consumption of wine, and remain on the same indifference curve.



50. The consumer's optimal choice is the one in which the marginal utility per dollar spent on good X is a. equal to the marginal utility per dollar saved on good X.b. greater than the marginal utility per dollar spent on good Y.c. equal to the marginal utility per dollar spent on good Y.d. less than the marginal utility per dollar spent on good Y.


51. When economists describe preferences, they often use the concept ofa. markets.b. income.c. utility.d. prices.

ANS: C DIF: 1 REF: 21-3 NAT: AnalyticLOC: Utility and consumer choice TOP: Utility MSC: Interpretive

52. Utility measures the a. income a consumer receives from consuming a bundle of goods.b. satisfaction a consumer receives from consuming a bundle of goods.c. satisfaction a consumer places on her budget constraint.d. All of the above are correct.

ANS: B DIF: 1 REF: 21-3 NAT: AnalyticLOC: Utility and consumer choice TOP: Utility MSC: Definitional

53. A rational consumer maximizes hera. preferences.b. marginal rate of substitution.c. utility.d. budget constraint.

ANS: C DIF: 1 REF: 21-3 NAT: AnalyticLOC: Utility and consumer choice TOP: Utility MSC: Interpretive

54. As more units of an item are purchased, everything else equal, marginal satisfaction from consuming additional units will tend toa. decrease at the same rate for all consumers.b. decrease but at different rates for different people.c. increase at the same rate for all consumers.d. increase but at a decreasing rate for all consumers.

ANS: B DIF: 2 REF: 21-3 NAT: AnalyticLOC: Utility and consumer choice TOP: Marginal utilityMSC: Analytical

55. If John's marginal utility derived from the consumption of another candy bar is 1 and the price of the candy bar is $1.50, thena. this is the last candy bar John will purchase since the marginal utility is less than the price.b. the opportunity cost of the candy bar is less than $1.50.c. if John purchases and consumes the candy bar his total satisfaction will go down since the marginal

utility is less than the price.d. there is not enough information to determine if John will or will not purchase the candy bar.

ANS: D DIF: 3 REF: 21-3 NAT: AnalyticLOC: Utility and consumer choice TOP: Marginal utilityMSC: Analytical

56. The marginal rate of substitution between two goods always equals thea. marginal utility of one divided by the marginal utility of the other.b. marginal utility of one times the marginal utility of the other.c. price of one good divided by the price of the other.d. Both a and c are correct.


ANS: A DIF: 2 REF: 21-3 NAT: AnalyticLOC: Utility and consumer choice TOP: Marginal rate of substitutionMSC: Interpretive

57. If income increases and prices are unchanged, the consumer’s budget constraint a. remains the same.b. shifts outward.c. shifts inward.d. rotates outward along the horizontal axis.


58. If income decreases and prices are unchanged, the consumer’s budget constraint a. remains the same.b. shifts outward.c. shifts inward.d. rotates outward along the horizontal axis.


59. Which of the following is not correct?a. An increase in income shifts a consumer’s budget constraint outward.b. An increase in the price of good X causes a consumer’s budget constraint to rotate inward along the

X axis.c. A decrease in the price of good Y causes a consumer’s budget constraint to rotate outward along

the Y axis.d. Changes in income affect the slope of the budget constraint as well as its location on a graph.


60. If we observe that Rae’s budget constraint has shifted outward, then we know for certain that a. her income must have increased.b. she will be indifferent between goods X and Y.c. the price of one or both of the goods must have decreased.d. she can reach a higher indifference curve.

ANS: D DIF: 2 REF: 21-3 NAT: AnalyticLOC: Utility and consumer choice TOP: Budget constraintMSC: Interpretive

61. If we observe that Rae’s budget constraint has shifted inward, then we know for certain that a. her income must have decreased.b. she will be indifferent between goods X and Y.c. the price of one or both of the goods must have increased.d. her utility will decrease.

ANS: D DIF: 2 REF: 21-3 NAT: AnalyticLOC: Utility and consumer choice TOP: Budget constraintMSC: Interpretive

62. If we observe that a consumer’s budget constraint has shifted outward, we can assume that the consumer will buya. fewer normal goods and more inferior goods.b. more normal goods and fewer inferior goods.c. more normal goods and more inferior goods.d. fewer normal goods and fewer inferior goods.


ANS: B DIF: 2 REF: 21-3 NAT: AnalyticLOC: Utility and consumer choice TOP: Normal goods | Inferior goodsMSC: Interpretive

63. If we observe that a consumer’s budget constraint has shifted inward, we can assume that the consumer will buya. fewer normal goods and more inferior goods.b. more normal goods and fewer inferior goods.c. more normal goods and more inferior goods.d. fewer normal goods and fewer inferior goods.

ANS: A DIF: 2 REF: 21-3 NAT: AnalyticLOC: Utility and consumer choice TOP: Normal goods | Inferior goodsMSC: Interpretive

64. When Sam has an income of $1,000, he consumes 30 units of good A and 50 units of good B. After Sam’s income increases to $1,500, he consumes 60 units of good A and 45 units of good B. Which of the following statements is correct?a. Both goods A and B are normal goods.b. Both goods A and B are inferior goods.c. Good A is a normal good, and good B is an inferior good.d. Good A is an inferior good, and good B is a normal good.

ANS: C DIF: 2 REF: 21-3 NAT: AnalyticLOC: Utility and consumer choice TOP: Normal goods | Inferior goodsMSC: Applicative

65. Jaime is currently consuming some of good X and some of good Y. If good Y is a normal good for this consumer, a rise in her income will definitely cause her to a. increase her consumption of X.b. increase her consumption of Y.c. decrease her consumption of X.d. decrease her consumption of Y.

ANS: B DIF: 1 REF: 21-3 NAT: AnalyticLOC: Utility and consumer choice TOP: Normal goodsMSC: Analytical

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

ANS: C DIF: 2 REF: 21-3 NAT: AnalyticLOC: Utility and consumer choice TOP: Normal goodsMSC: Analytical

67. Dave consumes two normal goods, X and Y, and is currently at an optimum. If the price of good X falls, we can predict with certainty thata. Dave will definitely consume more of both goods since his real income has risen.b. the substitution effect will be positive for good X and negative for good Y.c. may consume more or less of good X and he will definitely consume less of good Y.d. the substitution effect will offset the income effect for good X.

ANS: B DIF: 3 REF: 21-3 NAT: AnalyticLOC: Utility and consumer choice TOP: Normal goodsMSC: Analytical

68. A normal good is one in whicha. the average consumer chooses to consume at a normal level.b. the average consumer chooses to consume the good over other similar goods.c. an increase in income increases consumption of the good.d. an increase in income decreases consumption of the good.


ANS: C DIF: 1 REF: 21-3 NAT: AnalyticLOC: Utility and consumer choice TOP: Normal goodsMSC: Definitional

69. An inferior good is one in whicha. the average consumer chooses not to consume.b. the good is not equally valued by all consumers.c. an increase in income increases consumption of the good.d. an increase in income decreases consumption of the good.

ANS: D DIF: 1 REF: 21-3 NAT: AnalyticLOC: Utility and consumer choice TOP: Inferior goodsMSC: Definitional

70. Which of the following is most likely an inferior good?a. an antique carb. gasolinec. a bus ticketd. an airline ticket

ANS: C DIF: 1 REF: 21-3 NAT: AnalyticLOC: Utility and consumer choice TOP: Inferior goodsMSC: Applicative

71. A good is an inferior good if the consumer buys less of it whena. his income rises.b. the price of the good rises.c. the price of a substitute good falls.d. his income falls.

ANS: A DIF: 1 REF: 21-3 NAT: AnalyticLOC: Utility and consumer choice TOP: Inferior goodsMSC: Interpretive

72. Good X is an inferior good but not a Giffen good. When the price of X increases, the consumer will consumea. more X.b. the same amount of X.c. less X.d. more or less X depending on the size of the income effect relative to the size of the substitution

effect.

ANS: C DIF: 2 REF: 21-3 NAT: AnalyticLOC: Utility and consumer choice TOP: Inferior goodsMSC: Analytical

73. Suppose the price of good X falls. As a result, the quantity demanded for good X increases for a particular consumer. For this consumer, the substitution effect induced the consumer to purchase more X while the income effect induced the consumer to purchase less X. We can infer that X is a(n) a. normal good.b. inferior good.c. Giffen good.d. luxury good.

ANS: B DIF: 3 REF: 21-3 NAT: AnalyticLOC: Utility and consumer choice TOP: Inferior goodsMSC: Analytical

74. When the price of a good increases, all else equal, the higher pricea. reduces the consumer's set of buying opportunities.b. leads to a parallel shift of the budget constraint.c. will necessarily lead to an increase in the consumption of goods whose price did not change.d. generally discourages the consumption of inferior goods.


ANS: A DIF: 2 REF: 21-3 NAT: AnalyticLOC: Utility and consumer choice TOP: OptimizationMSC: Analytical

75. If the price of a good increases, all else equal, consumers perceivea. an increase in purchasing power if the good is an inferior good.b. an increase in income if the price increase occurs for a normal good.c. a decrease in purchasing power.d. a net gain in purchasing power if they decrease consumption of some goods.

ANS: C DIF: 2 REF: 21-3 NAT: AnalyticLOC: Utility and consumer choice TOP: Income effectMSC: Analytical

76. Consider the indifference curve map and budget constraint for two goods, X and Y. Suppose the good on the horizontal axis, X, is normal. When the price of X increasesa. the substitution effect and income effect both cause an increase in the consumption of X.b. the substitution effect causes a decrease in the consumption of X, and the income effect causes an

increase in the consumption of X. However, the substitution effect is greater than the income effect.c. the substitution effect causes an increase in the consumption of X, and the income effect causes a

decrease in the consumption of X. However, the substitution effect is greater than the income effect.

d. the substitution effect and income effect both cause a decrease in the consumption of X.

ANS: D DIF: 2 REF: 21-3 NAT: AnalyticLOC: Utility and consumer choice TOP: Normal goods | Income effect | Substitution effectMSC: Analytical

77. A consumer consumes two normal goods, pretzels and Mt. Dew. The price of pretzels rises. The income effect, by itself, suggests that the consumer will consume a. more pretzels and more Mt. Dews.b. fewer pretzels and fewer Mt. Dews.c. more pretzels and fewer Mt. Dews.d. fewer pretzels and more Mt. Dews.

ANS: B DIF: 3 REF: 21-3 NAT: AnalyticLOC: Utility and consumer choice TOP: Income effectMSC: Applicative

78. If the income effect counteracts the substitution effect, we know that the good in question is a(n)a. complementary good.b. inferior good.c. luxury good.d. normal good.

ANS: B DIF: 1 REF: 21-3 NAT: AnalyticLOC: Utility and consumer choice TOP: Inferior goods | Substitution effect | Income effectMSC: Definitional

79. What are the two effects of a change in a price that a consumer experiences?a. the income effect and the budget effectb. the complement effect and the substitute effectc. the price effect and the preference effectd. the income effect and the substitution effect

ANS: D DIF: 2 REF: 21-3 NAT: AnalyticLOC: Utility and consumer choice TOP: Income effect | Substitution effectMSC: Definitional


80. When the price of a normal good increases, a. both the income and substitution effects encourage the consumer to purchase more of the good.b. both the income and substitution effects encourage the consumer to purchase less of the good.c. the income effect encourages the consumer to purchase more of the good, and the substitution

effect encourages the consumer to purchase less of the good.d. the income effect encourages the consumer to purchase less of the good, and the substitution effect

encourages the consumer to purchase more of the good.

ANS: B DIF: 2 REF: 21-3 NAT: AnalyticLOC: Utility and consumer choice TOP: Income effect | Substitution effectMSC: Analytical

81. When the price of a normal good decreases, a. both the income and substitution effects encourage the consumer to purchase more of the good.b. both the income and substitution effects encourage the consumer to purchase less of the good.c. the income effect encourages the consumer to purchase more of the good, and the substitution



ANS: A DIF: 2 REF: 21-3 NAT: AnalyticLOC: Utility and consumer choice TOP: Income effect | Substitution effectMSC: Analytical

82. When the price of an inferior good increases, a. both the income and substitution effects encourage the consumer to purchase more of the good.b. both the income and substitution effects encourage the consumer to purchase less of the good.c. the income effect encourages the consumer to purchase more of the good, and the substitution



ANS: C DIF: 2 REF: 21-3 NAT: AnalyticLOC: Utility and consumer choice TOP: Income effect | Substitution effectMSC: Analytical

83. When the price of an inferior good decreases, a. both the income and substitution effects encourage the consumer to purchase more of the good.b. both the income and substitution effects encourage the consumer to purchase less of the good.c. the income effect encourages the consumer to purchase more of the good, and the substitution



ANS: D DIF: 2 REF: 21-3 NAT: AnalyticLOC: Utility and consumer choice TOP: Income effect | Substitution effectMSC: Analytical

84. A decrease in the price of DVD players leads consumers to buy more DVD players. From this information we can conclude that DVD playersa. are normal goods.b. are inferior goods.c. are luxury goods.d. None of the above is correct.

ANS: D DIF: 3 REF: 21-3 NAT: AnalyticLOC: Utility and consumer choice TOP: Income effectMSC: Interpretive


85. Energy drinks and granola bars are normal goods. When the price of energy drinks decreases, the income effect causes aa. shift to a lower indifference curve and the consumer buys fewer granola bars.b. shift to a higher indifference curve and the consumer buys more granola bars.c. movement along the indifference curve and the consumer buys fewer granola bars.d. movement along the indifference curve and the consumer buys more granola bars.

ANS: B DIF: 3 REF: 21-3 NAT: AnalyticLOC: Utility and consumer choice TOP: Income effectMSC: Analytical

86. Energy drinks and granola bars are normal goods. When the price of energy drinks decreases, the income effect causesa. the consumer to feel richer, so the consumer buys more granola bars.b. the consumer to feel richer, so the consumer buys fewer granola bars.c. granola bars to be relatively more expensive, so the consumer buys more granola bars.d. granola bars to be relatively less expensive, so the consumer buys fewer granola bars.

ANS: A DIF: 2 REF: 21-3 NAT: AnalyticLOC: Utility and consumer choice TOP: Income effectMSC: Analytical

87. Assume that a college student purchases only coffee and Snickers bars. If coffee is an inferior good and Snickers bars are a normal good, then the income effect associated with an increase in the price of a Snickers bar will result ina. a decrease in the consumption of Snickers bars and a decrease in the consumption of coffee.b. a decrease in the consumption of Snickers bars and an increase in the consumption of coffee.c. an increase in the consumption of Snickers bars and an increase in the consumption of coffee.d. an increase in the consumption of Snickers bars and a decrease in the consumption of coffee.


88. Assume that a college student purchases only coffee and Snickers bars. If both coffee and Snickers bars are normal goods, then the income effect associated with a decrease in the price of a Snickers bar will result ina. a decrease in the consumption of Snickers bars and an increase in the consumption of coffee.b. a decrease in the consumption of Snickers bars and a decrease in the consumption of coffee.c. an increase in the consumption of Snickers bars and a decrease in the consumption of coffee.d. an increase in the consumption of Snickers bars and an increase in the consumption of coffee.

ANS: D DIF: 1 REF: 21-3 NAT: AnalyticLOC: Utility and consumer choice TOP: Income effectMSC: Analytical

89. A consumer consumes two normal goods, pretzels and Mt. Dew. The price of Mt. Dew rises. The substitution effect, by itself, suggests that the consumer will consume a. more pretzels and more Mt. Dews.b. fewer pretzels and fewer Mt. Dews.c. more pretzels and fewer Mt. Dews.d. fewer pretzels and more Mt. Dews.

ANS: C DIF: 3 REF: 21-3 NAT: AnalyticLOC: Utility and consumer choice TOP: Substitution effectMSC: Applicative

90. The income effect of a price change is depicted bya. a parallel shift of the budget constraint at the old set of prices.b. a parallel shift of the budget constraint at the new set of prices.c. a movement along the budget constraint holding the level of satisfaction constant.d. not observable and is therefore neither a shift nor a change in the slope of the budget constraint.



91. Assume that a college student purchases only coffee and Snickers bars. The substitution effect associated with a decrease in the price of a Snickers bar will result ina. an increase in the consumption of coffee only.b. a decrease in the consumption of coffee only.c. an increase in the consumption of Snickers bars and a decrease in the consumption of coffee.d. a decrease in the consumption of Snickers bars and an increase in the consumption of coffee.

ANS: C DIF: 2 REF: 21-3 NAT: AnalyticLOC: Utility and consumer choice TOP: Substitution effectMSC: Analytical

92. Consider a consumer who purchases two goods, X and Y. If the price of good Y falls, then the substitution effect by itself willa. cause the consumer to buy more of good Y and less of good X.b. cause the consumer to buy more of good X and less of good Y.c. not affect the amount of goods X and Y that the consumer buys.d. result in an upward-sloping demand for good Y if the substitution effect is positive.

ANS: A DIF: 2 REF: 21-3 NAT: AnalyticLOC: Utility and consumer choice TOP: Substitution effectMSC: Analytical

93. Pepsi and pizza are normal goods. When the price of pizza falls, the substitution effect causes aa. shift to a lower indifference curve and the consumer buys less Pepsi.b. shift to a higher indifference curve and the consumer buys more Pepsi.c. movement along the indifference curve and the consumer buys more Pepsi.d. movement along the indifference curve and the consumer buys less Pepsi.

ANS: D DIF: 3 REF: 21-3 NAT: AnalyticLOC: Utility and consumer choice TOP: Substitution effectMSC: Analytical

94. Beer and pretzels are normal goods. When the price of beer falls, the substitution effect causesa. the consumer to feel richer, so the consumer buys more pretzels.b. the consumer to feel richer, so the consumer buys less pretzels.c. pretzels to be relatively more expensive, so the consumer buys less pretzels.d. pretzels to be relatively less expensive, so the consumer buys more pretzels.


95. Pepsi and pizza are normal goods. When the price of pizza rises, the substitution effect causes Pepsi to be relativelya. more expensive, so the consumer buys more Pepsi.b. more expensive, so the consumer buys less Pepsi.c. less expensive, so the consumer buys more Pepsi.d. less expensive, so the consumer buys less Pepsi.


96. Which effect of a price change moves the consumer along the same indifference curve to a point with a new marginal rate of substitution?a. the budget effectb. the preference effectc. the substitution effectd. the income effect

ANS: C DIF: 1 REF: 21-3 NAT: AnalyticLOC: Utility and consumer choice TOP: Substitution effectMSC: Definitional


97. The substitution effect of a price change is depicted by a a. movement along the budget constraint holding satisfaction constant.b. shift in the budget constraint at the old prices.c. movement along the consumer’s new indifference curve at the new prices.d. movement along the original indifference curve to the point where the marginal rate of substitution

equals the price ratio for the new set of prices.

ANS: D DIF: 3 REF: 21-3 NAT: AnalyticLOC: Utility and consumer choice TOP: Substitution effectMSC: Analytical

98. Which of the following descriptions best depicts the substitution effect?a. the change in consumption resulting from a change in the consumer's income, holding the prices of

the goods constantb. the change in consumption resulting from a change in the consumer's income, holding the

consumer's level of satisfaction constantc. the change in consumption resulting from a change in the price of one good, holding the consumer's

level of satisfaction constantd. the change in consumption resulting from a change in the price of one good, allowing the

consumer's level of satisfaction to change

ANS: C DIF: 2 REF: 21-3 NAT: AnalyticLOC: Utility and consumer choice TOP: Substitution effectMSC: Definitional

99. If the price of hamburgers increases, the substitution effect works toa. decrease the quantity of hamburgers supplied.b. increase the number of hamburger buns demanded.c. decrease the quantity of hamburgers demanded.d. increase the number of hamburger buns supplied.


100. The change in consumption that results when a price change moves the consumer along a given indifference curve to a point with a new marginal rate of substitution is called the a. income effect.b. substitution effect.c. Giffen good effect.d. inferior good effect.

ANS: B DIF: 1 REF: 21-3 NAT: AnalyticLOC: Utility and consumer choice TOP: Substitution effectMSC: Definitional

101. Suppose that for Emily, DVDs and trips to the movie theater are perfect substitutes. Currently, Emily is spending all of her income on trips to the movie theater. If the price of DVDs doubles, the substitution effect willa. be two times the income effect.b. be half the income effect.c. be zero.d. always increase the number of trips to the movie theater Emily makes.

ANS: C DIF: 3 REF: 21-3 NAT: AnalyticLOC: Utility and consumer choice TOP: Perfect substitutes | Substitution effectMSC: Analytical


Figure 21-12

102. Refer to Figure 21-12. If the consumer is currently at point A in the figure, a movement to point B as a result of a decrease in the price of potato chips represents thea. substitution effect.b. income effect.c. budget effect.d. price effect.

ANS: A DIF: 2 REF: 21-3 NAT: AnalyticLOC: Utility and consumer choice TOP: Substitution effectMSC: Interpretive

103. Refer to Figure 21-12. If the consumer was initially at point A in the figure, a movement from point B to point C as a result of a decrease in the price of potato chips represents thea. substitution effect.b. income effect.c. budget effect.d. price effect.

ANS: B DIF: 2 REF: 21-3 NAT: AnalyticLOC: Utility and consumer choice TOP: Income effectMSC: Interpretive

104. Refer to Figure 21-12. The shift from point B to point C in the figure is due to thea. substitution effect of an increase in the price of potato chips.b. income effect of an increase in the price of potato chips.c. substitution effect of a decrease in the price of potato chips.d. income effect of a decrease in the price of potato chips.

ANS: D DIF: 2 REF: 21-3 NAT: AnalyticLOC: Utility and consumer choice TOP: Income effectMSC: Analytical

105. Suppose the price of good X falls and the consumption of good X increases. From this we can infer that X is a(n) a. normal good.b. inferior good.c. Giffen good.d. None of the above is correct.

ANS: D DIF: 2 REF: 21-3 NAT: AnalyticLOC: Utility and consumer choice TOP: Demand curveMSC: Interpretive


106. A consumer consumes two normal goods, pretzels and Mt. Dew. When the price of Mt. Dew is $0.50 per can, the consumer purchases 40 cans. When the price rises to $0.65 per can, the consumer purchases 30 cans. We can use the information provided by the consumer’s optimum choices to derive the a. demand curve.b. supply curve.c. production possibilities frontier.d. labor-leisure tradeoff.

ANS: A DIF: 2 REF: 21-3 NAT: AnalyticLOC: Utility and consumer choice TOP: Demand curveMSC: Applicative

107. When we derive the demand curve for a good, we should remember that thea. income effect must be greater than the substitution effect.b. substitution effect must be greater than the income effect.c. substitution effect must be in the same direction as the income effect.d. income effect and the substitution effect may work in the same or in opposite directions.


108. Given a consumer's indifference map, the demand curve for a good cana. be derived by moving a consumer's budget constraint as her income falls.b. be derived by moving a consumer's budget constraint as her income rises.c. be derived by moving a consumer's budget constraint as the market price of one good changes.d. not be derived from consumer theory.

ANS: C DIF: 2 REF: 21-3 NAT: AnalyticLOC: Utility and consumer choice TOP: Demand curveMSC: Interpretive

109. An individual's demand curve for a good is derived by varying the a. income level and observing the resulting total utility derived from both goods.b. price of one good and observing the resulting quantities of the other good.c. budget line to the left and calculating the loss in total utility.d. price of one good and observing the resulting quantities demanded of that good.


110. Consumer theory provides the foundation for understanding demand curves because a. each point on a demand curve represents an optimal choice point.b. consumers purchase more inferior goods than normal goods.c. increases in income cause the budget constraint to rotate inward along one axis, which changes the

consumer’s purchases.d. increases in income cause the budget constraint to rotate outward along one axis, which changes the

consumer’s purchases.

ANS: A DIF: 2 REF: 21-3 NAT: AnalyticLOC: Utility and consumer choice TOP: Demand curveMSC: Applicative

Sec 04 - The Theory of Consumer Choice - Three Applications

MULTIPLE CHOICE

1. We can use the theory of consumer choice to analyze a. why most demand curves slope downward.b. the tradeoff between work and leisurec. how interest rates affect household saving.d. All of the above are correct.


ANS: D DIF: 1 REF: 21-4 NAT: AnalyticLOC: Utility and consumer choice TOP: Consumer choiceMSC: Applicative

2. If a good is a Giffen good, thena. the supply curve slopes down.b. the demand curve slopes up.c. the demand curve is horizontal.d. there is no optimal level of consumption for the consumer.

ANS: B DIF: 1 REF: 21-4 NAT: AnalyticLOC: Utility and consumer choice TOP: Giffen good MSC: Definitional

3. A Giffen good is a good for which an increase in the pricea. decreases the quantity supplied.b. increases the quantity supplied.c. decreases the quantity demanded.d. increases the quantity demanded.

ANS: D DIF: 1 REF: 21-4 NAT: AnalyticLOC: Utility and consumer choice TOP: Giffen good MSC: Definitional

4. A Giffen good is a good for which a. an increase in the price raises the quantity demanded.b. the income effect outweighs the substitution effect.c. an increase in the price decreases the quantity demanded.d. Both a) and b) are correct.


5. A Giffen good is a good for which a. a decrease in the price decreases the quantity demanded.b. the substitution effect outweighs the income effect.c. an increase in the price decreases the quantity demanded.d. Both a) and b) are correct.

ANS: A DIF: 2 REF: 21-4 NAT: AnalyticLOC: Utility and consumer choice TOP: Giffen good MSC: Definitional

6. A Giffen good is a good for which a. a decrease in the price decreases the quantity demanded.b. the income effect outweighs the substitution effect.c. an increase in the price decreases the quantity demanded.d. Both a) and b) are correct.


7. When a consumer experiences a price increase for an inferior good, it is possible that the income effect isa. greater than the substitution effect, and the demand curve will be downward sloping.b. greater than the substitution effect, and the demand curve will be upward sloping.c. less than the substitution effect, and the demand curve will be upward sloping.d. less than the substitution effect but that the substitution effect is positive, and the demand curve will

be upward sloping.

ANS: B DIF: 2 REF: 21-4 NAT: AnalyticLOC: Utility and consumer choice TOP: Giffen good MSC: Analytical

8. When a consumer experiences a price decrease for an inferior good, it is possible that the income effect isa. less than the substitution effect, and the demand curve will be downward sloping.b. greater than the substitution effect, and the demand curve will be upward sloping.c. less than the substitution effect, and the demand curve will be upward sloping.d. both a and b are correct.


ANS: D DIF: 2 REF: 21-4 NAT: AnalyticLOC: Utility and consumer choice TOP: Giffen good MSC: Analytical

9. Consider the indifference curve map and budget constraint for two goods, beef and potatoes. Suppose the good on the horizontal axis, potatoes, is a Giffen good. Beef is measured on the vertical axis and is a normal good. When the price of potatoes increases,a. the substitution effect causes an increase in the consumption of potatoes, and the income effect

causes a decrease in the consumption of potatoes. The substitution effect is less than the income effect.

b. the substitution effect causes a decrease in the consumption of potatoes, and the income effect causes an increase in the consumption of potatoes. The substitution effect is greater than the income effect.

c. the substitution effect causes an increase in the consumption of potatoes, and the income effect causes a decrease in the consumption of potatoes. The substitution effect is greater than the income effect.

d. the substitution effect causes a decrease in the consumption of potatoes, and the income effect causes an increase in the consumption of potatoes. The substitution effect is less than the income effect.


10. A Giffen good is one in which the quantity demanded rises as the price rises because the income effecta. reinforces the substitution effect.b. reinforces and is greater than the substitution effect.c. counteracts but is smaller than the substitution effect.d. counteracts and is greater than the substitution effect.

ANS: D DIF: 2 REF: 21-4 NAT: AnalyticLOC: Utility and consumer choice TOP: Giffen good MSC: Interpretive

11. Violations of the law of demand are assumed to occura. regularly.b. only when goods are Giffen goods.c. only when the substitution effect dominates the income effect.d. All of the above are correct.

ANS: B DIF: 2 REF: 21-4 NAT: AnalyticLOC: Utility and consumer choice TOP: Giffen good MSC: Interpretive

12. Giffen goods have positively-sloped demand curves because they area. inferior goods with no substitution effect.b. normal goods with no substitution effect.c. inferior goods for which the substitution effect outweighs the income effect.d. inferior goods for which the income effect outweighs the substitution effect.


13. Giffen goods have positively-sloped demand curves because they area. normal goods for which the income effect outweighs the substitution effect.b. normal goods for which the substitution effect outweighs the income effect.c. inferior goods for which the income effect outweighs the substitution effect.d. inferior goods for which the substitution effect outweighs the income effect.

ANS: C DIF: 2 REF: 21-4 NAT: AnalyticLOC: Utility and consumer choice TOP: Giffen good MSC: Definitional


14. Which of the following statements is not correct?a. Reducing taxes on interest income might encourage people to save more.b. Reducing taxes on interest income might reduce saving.c. A price increase will create income and substitution effects that will both always work to reduce

consumption of the good.d. Utility is maximized when the marginal rate of substitution between any two goods equals the

relative prices of the two goods.

ANS: C DIF: 3 REF: 21-4 NAT: AnalyticLOC: Utility and consumer choice TOP: Giffen good MSC: Analytical

15. Which of the following is an example of a Giffen good?a. potatoes during the Irish potato famineb. rice in the Chinese province of Hunanc. fish in Japand. Both a and b are correct.


16. Which of the following is an example of a Giffen good?a. fish in Japanb. rice in the Chinese province of Hunanc. pork in Indiad. Both a and b are correct.

ANS: B DIF: 3 REF: 21-4 NAT: AnalyticLOC: Utility and consumer choice TOP: Giffen good MSC: Analytical

17. The two “goods” used when economists analyze labor supply area. work and leisure.b. work and consumption.c. saving and consumption.d. leisure and consumption.

ANS: D DIF: 1 REF: 21-4 NAT: AnalyticLOC: Utility and consumer choice TOP: Labor supplyMSC: Interpretive

18. Economic theory predicts that an increase in wagesa. will cause a wage earner to work more.b. will cause a wage earner to work less.c. will cause a wage earner to be more productive.d. might cause a wage earner to work more or work less.

ANS: D DIF: 2 REF: 21-4 NAT: AnalyticLOC: Utility and consumer choice TOP: Labor supplyMSC: Interpretive

19. The substitution effect of a wage decrease in the work-leisure model results in the worker choosing toa. work less than before.b. work more than before.c. possibly work more or less than before.d. work more with a higher level of consumption.

ANS: A DIF: 3 REF: 21-4 NAT: AnalyticLOC: Utility and consumer choice TOP: Labor supplyMSC: Analytical

20. In the work-leisure model, suppose consumption and leisure are both normal goods. The income effect of a wage increase results in the worker choosing toa. work less than before.b. work more than before.c. possibly work more or less than before.d. work more than before with a higher level of consumption.



Scenario 21-2Fred has recently graduated from college with a degree in journalism and economics. He has decided to pursue a career as a freelance journalist writing for business newspapers and magazines. Fred is typically awake for 112 hours each week (he sleeps an average of 8 hours each day). For each hour Fred spends writing, he can earn $75. Fred is such a good writer that he can get paid for as many hours of writing as he chooses to work.

21. Refer to Scenario 21-2. If Fred decides to spend 80 hours a week playing volleyball on the beach, and the rest of his time writing, how much income will he have available to spend on consumption goods?a. $900b. $1,500c. $2,400d. $3,000

ANS: C DIF: 2 REF: 21-4 NAT: AnalyticLOC: Utility and consumer choice TOP: Labor supplyMSC: Applicative

22. Refer to Scenario 21-2. If Fred’s wage increases to $90 per hour of writing, which of the following points would fall on his budget constraint?a. 75 hours of leisure, $2,775 of consumptionb. 80 hours of leisure, $2,400 of consumptionc. 85 hours of leisure, $2,430 of consumptiond. 90 hours of leisure, $1,650 of consumption

ANS: C DIF: 2 REF: 21-4 NAT: AnalyticLOC: Utility and consumer choice TOP: Labor supplyMSC: Applicative

23. The labor supply curve may have a backward bending portion because at higher wages thea. income effect is smaller than the substitution effect.b. income effect is larger than the substitution effect.c. income effect is negative.d. Any of the above could result in a backward-bending supply curve.

ANS: B DIF: 2 REF: 21-4 NAT: AnalyticLOC: Utility and consumer choice TOP: Labor supplyMSC: Interpretive

24. When leisure is a normal good, the income effect from a decrease in wages is evident ina. a desire to consume more leisure.b. a desire to consume less leisure.c. an upward-sloping labor supply curve.d. a shift in labor demand.

ANS: B DIF: 3 REF: 21-4 NAT: AnalyticLOC: Utility and consumer choice TOP: Labor supplyMSC: Analytical

25. The substitution effect from an increase in wages is evident in a a. decrease in labor demand.b. desire to consume less leisure.c. desire to consume more leisure.d. backward-bending labor supply curve.



26. If leisure were an inferior good, then labor supply curvesa. would all be negatively sloped.b. would all be positively sloped.c. would all be vertical.d. could still be positively or negatively sloped.


27. A consumer has preferences over consumption and leisure, both of which are normal goods. When the wage decreases, the consumer chooses to consume less leisure. For this consumer the labor supply curve willa. slope upward.b. slope backward.c. be horizontal.d. be vertical.


28. Suppose that Stacy’s hourly wage increases, and she decides to work fewer hours. For her, the substitution effect of the wage change isa. only partially offset by the income effect.b. more than offset by the income effect.c. exactly offset by the income effect.d. We do not have enough information with which to answer the question..

ANS: B DIF: 3 REF: 21-4 NAT: AnalyticLOC: Utility and consumer choice TOP: Labor supplyMSC: Applicative

29. In the upward-sloping portion of the individual labor supply curve, the substitution effect isa. greater than the income effect.b. less than the income effect.c. equal to the income effect.d. exactly offset by the income effect.

ANS: A DIF: 2 REF: 21-4 NAT: AnalyticLOC: Utility and consumer choice TOP: Labor supplyMSC: Applicative

30. Tom experiences an increase in his wages. The hours of labor that he supplies to the market would increase if a. the income effect is larger than the substitution effect.b. the substitution effect is larger than the income effect.c. neither the income effect nor the substitution effect apply to Tom’s labor-leisure tradeoff.d. Tom views both labor and leisure as inferior goods.


31. Harry experiences an increase in his wages. The hours of labor that he supplies to the market would decrease if a. the income effect is larger than the substitution effect.b. the substitution effect is larger than the income effect.c. neither the income effect nor the substitution effect apply to Harry’s labor-leisure tradeoff.d. Harry views both labor and leisure as inferior goods.



32. Which of the following statements is not correct?a. If Jane gets a higher wage and works more, the substitution effect is greater than the income effect

for her.b. If Spencer experiences a wage decrease and works less, the income effect is greater than the

substitution effect for him.c. If the substitution effect is greater than the income effect, the labor-supply curve is upward sloping.d. If the income effect is greater than the substitution effect, the labor-supply curve is downward

sloping.


33. Economic studies of lottery winners and people who have inherited large amounts of money show that a. the income effect likely outweighs the substitution effect for most people.b. the substitution effect likely outweighs the income effect for most people.c. most people view leisure as an inferior good.d. most people’s labor supply is unaffected by changes in wealth.

ANS: A DIF: 2 REF: 21-4 NAT: AnalyticLOC: Utility and consumer choice TOP: Labor supplyMSC: Applicative

34. Jake faces tradeoffs between consuming in the current period when he is young and consuming in a future period when he is old. Jake experiences a decrease in the current interest rate he earns on his savings. Jake will save a. less in the current period if the substitution effect is greater than the income effect.b. less in the current period if the income effect is greater than the substitution effect.c. more in the current period if the substitution effect is greater than the income effect.d. more in the current period, regardless of the sizes of the income and substitution effects.

ANS: A DIF: 3 REF: 21-4 NAT: AnalyticLOC: Utility and consumer choice TOP: Consumption-saving decisionMSC: Analytical

35. When considering household saving, the relative price between consuming when young and consuming when old is thea. consumption rate.b. interest rate that individuals can earn on their private savings.c. prime rate.d. federal funds rate.

ANS: B DIF: 2 REF: 21-4 NAT: AnalyticLOC: Utility and consumer choice TOP: Consumption-saving decisionMSC: Interpretive

36. If the interest rate rises, an individual could choose toa. increase consumption when young.b. increase consumption when old.c. decrease consumption when young.d. Any of the above could be correct.

ANS: D DIF: 2 REF: 21-4 NAT: AnalyticLOC: Utility and consumer choice TOP: Consumption-saving decisionMSC: Analytical

37. The substitution effect of an increase in the interest rate will result in an increase ina. consumption when young and increase in savings when young.b. consumption when old and an increase in savings when young.c. consumption when young and an increase in savings when old.d. savings when old and an increase in consumption when old.

ANS: B DIF: 3 REF: 21-4 NAT: AnalyticLOC: Utility and consumer choice TOP: Consumption-saving decisionMSC: Analytical


38. Assume that consumption when young and consumption when old are both normal goods. The income effect of an increase in the interest rate will result ina. an increase in saving when young.b. an increase in saving when old.c. a decrease in saving when young.d. a decrease in saving when old.

ANS: C DIF: 2 REF: 21-4 NAT: AnalyticLOC: Utility and consumer choice TOP: Consumption-saving decisionMSC: Analytical

Scenario 21-3Diane 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.

39. Refer to Scenario 21-3. Assume that Diane decides to consume $100,000 in the work period. How much money will she have available for consumption in her retirement period?a. $100,000b. $110,000c. $150,000d. $165,000

ANS: D DIF: 2 REF: 21-4 NAT: AnalyticLOC: Utility and consumer choice TOP: Consumption-saving decisionMSC: Applicative

40. Refer to Scenario 21-3. If the interest rate on savings increases, it is possible thata. Diane will decrease her savings in the work period.b. Diane will increase her savings in the work period.c. Diane will not change her consumption in the work period.d. All of the above are possible.


41. Refer to Scenario 21-3. If the interest rate on savings increases, a. Diane will decrease her savings in the work period if the income effect is greater than the

substitution effect for her.b. Diane will increase her savings in the work period if the income effect is greater than the

substitution effect for her.c. Diane will increase her savings in the work period if the substitution effect is greater than the

income effect for her.d. Both a and c are correct.


42. Jonathan is planning ahead for retirement and must decide how much to spend and how much to save while he's working in order to have money to spend when he retires. When the income effect dominates the substitution effect, an increase in the interest rate on savings will cause him toa. decrease his savings rate.b. increase his savings rate.c. continue saving at the current rate.d. Any of the above could be correct.



43. Jonathan is planning ahead for retirement and must decide how much to spend and how much to save while he's working in order to have money to spend when he retires. When the substitution effect dominates the income effect, an increase in the interest rate on savings will cause him to a. increase his savings rate.b. decrease his savings rate.c. continue saving at the same rate.d. Any of the above are possible.


44. 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 and consumption when old is graphed on the vertical axis?a. -0.89b. -1.05c. -1.07d. -1.12

ANS: C DIF: 3 REF: 21-4 NAT: AnalyticLOC: Utility and consumer choice TOP: Consumption-saving decisionMSC: Analytical

45. Suppose Olivia is planning for retirement in a two-period world. In the first period Olivia is young and earns $1 million, and in the second period Olivia is old and retired and earns nothing. The interest rate is initially 10 percent, but then it falls to 7 percent. Which of the following statements is correct?a. After the interest rate falls, the substitution effect will induce Olivia to consume more when she is

young.b. After the interest rate falls, the substitution effect will induce Olivia to consume less when she is

young.c. After the interest rate falls, the income effect will induce Olivia to consume more when she is

young.d. A change in interest rates affects the substitution effect but not the income effect.


46. One of the primary research results in tax policy analysis over the last 20 years is thata. an increase in interest rates will increase saving.b. an increase in interest rates will decrease saving.c. lowering taxes on interest income will increase saving.d. None of the above is correct.

ANS: D DIF: 2 REF: 21-4 NAT: AnalyticLOC: Utility and consumer choice TOP: Consumption-saving decisionMSC: Interpretive

47. The opportunity cost of current household consumption is thea. wage rate.b. market interest rate.c. price of the goods consumed.d. explicit cost of consumption.

ANS: B DIF: 2 REF: 21-4 NAT: AnalyticLOC: Utility and consumer choice TOP: Consumption-saving decisionMSC: Definitional


48. Suppose that you have $100 today and expect to receive $100 one year from today. Your money market account pays an annual interest rate of 25%, and you may borrow money at that interest rate. If you save all your money, how much money will you have one year from today?a. $100b. $125c. $200d. $225

ANS: D DIF: 1 REF: 21-4 NAT: AnalyticLOC: Utility and consumer choice TOP: Consumption-saving decisionMSC: Applicative

49. Suppose that you have $100 today and expect to receive $100 one year from today. Your money market account pays an annual interest rate of 25%, and you may borrow money at that interest rate. Suppose that you borrow $60 and spend $160 today. After you repay your loan one year from today, how much money will you have available for consumption one year from today?a. $0b. $25c. $50d. $75

ANS: B DIF: 3 REF: 21-4 NAT: AnalyticLOC: Utility and consumer choice TOP: Consumption-saving decisionMSC: Applicative

50. Suppose that you have $100 today and expect to receive $100 one year from today. Your money market account pays an annual interest rate of 25%, and you may borrow money at that interest rate. Consider the budget constraint between “spending today” on the horizontal axis and “spending a year from today” on the vertical axis. What is the slope of this budget constraint?a. -0.75b. -1.00c. -1.25d. -2.25

ANS: C DIF: 3 REF: 21-4 NAT: AnalyticLOC: Utility and consumer choice TOP: Consumption-saving decisionMSC: Applicative

51. Consider the budget constraint between “spending today” on the horizontal axis and “spending a year from today” on the vertical axis. Suppose that you have $100 today and expect to receive $100 one year from today. Your money market account pays an annual interest rate of 25%, and you may borrow money at that interest rate. Suppose now that the interest rate increases to 40%. What happens to the slope of your budget constraint relative to when the interest rate was $25%? The slope a. becomes steeper.b. becomes flatter.c. doesn't change because the budget constraint shifts in parallel to the original budget constraint.d. doesn't change because the budget constraint shifts out parallel to the original budget constraint.


52. Consider the budget constraint between “spending today” on the horizontal axis and “spending a year from today” on the vertical axis. Suppose that you have $100 today and expect to receive $100 one year from today. Your money market account pays an annual interest rate of 25%, and you may borrow money at that interest rate. Suppose now that the interest rate decreases to 10%. What happens to the slope of your budget constraint relative to when the interest rate was $25%? The slope a. becomes steeper.b. becomes flatter.c. doesn't change because the budget constraint shifts in parallel to the original budget constraint.d. doesn't change because the budget constraint shifts out parallel to the original budget constraint.


ANS: B DIF: 3 REF: 21-4 NAT: AnalyticLOC: Utility and consumer choice TOP: Consumption-saving decisionMSC: Analytical

Sec 05 - The Theory of Consumer Choice - Conclusion

MULTIPLE CHOICE

1. The theory of consumer choice explains how people choose between a. textbooks and energy drinks.b. labor and leisure.c. spending now and spending in the future.d. All of the above are correct.

ANS: D DIF: 1 REF: 21-5 NAT: AnalyticLOC: Utility and consumer choice TOP: Consumer choiceMSC: Applicative

2. The theory of consumer choice provides a(n) a. literal account of how people make decisions.b. unrealistic picture of how people make decisions.c. model that is consistent with how people make decisions.d. in-depth model that is based more in psychology than in economics.

ANS: C DIF: 1 REF: 21-5 NAT: AnalyticLOC: Utility and consumer choice TOP: Consumer choiceMSC: Applicative

Business

曼昆《经济学原理》（微观）第五版测试题库 (21)