Deck 5: Background to Demand: Consumer Choices

Question 1

If a consumer spent their entire income on crisps and cola, what would happen if the consumer's income were to double and the prices of crisps and cola were also to double?

A) The consumer's budget line would remain unchanged.
B) The consumer's budget line would shift outward but remain parallel to the original budget line.
C) The consumer's budget line would shift inward but remain parallel to the original budget line.
D) The consumer's budget line would shift in an unpredictable way.

Answer 1

A

Question 2

Indifference curves tend to be bowed inward because a consumer is willing to trade a greater amount of a good for another if they have an abundance of the good they are trading away.

Answer 2

True

Question 3

All of the following are characteristics of an indifference map except

A) moving northeast to a new, higher 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.

Answer 3

C

Question 4

A budget constraint is a set of commodity bundles that provide the consumer with the same level of satisfaction.

Question 5

When drawn on a graph that measures the quantity of a good on each axis, indifference curves are usually straight lines that slope downward (negatively).

Question 6

If the price of a good falls and the good is a normal good, the income effect causes a decrease in the quantity demanded of that good.

Question 7

Suppose the price of a pizza is €8, the price of a milk shake is €2, and the consumer's weekly income is €32. Suppose we have constructed the consumer's budget line with pizzas on the vertical axis and milk shakes on the horizontal axis. Given this information, if the consumer's income rises to €48, then what will happen to the consumer's budget line?

A) It move outwards so that it now intersects the vertical axis at 6 pizzas per week and the horizontal axis at 24 milk shakes per week.
B) It would not change.
C) It would move inwards so that it now intersects the vertical axis at 3 pizzas per week and the horizontal axis at 8 milk shakes per week.
D) It would rotate in a clockwise direction around the point at which it intersects the horizontal axis.

Question 8

At the consumer's optimum point, the marginal rate of substitution of apples for oranges is equal to the ratio of the price of oranges to the price of apples.

Question 9

A family on a trip budgets €800 for restaurant meals and fast food. If the price of a fast food meal for the family is €20, how many such meals can the family buy if they do not eat at restaurants?

A) 8
B) 15
C) 20
D) 40

Question 10

If income were to double and prices were to double, the budget line would

A) stay the same.
B) rotate inward.
C) shift outward in a parallel fashion.
D) rotate outward.
E) shift inward in a parallel fashion.

Question 11

A Giffen good is an extremely inferior good.

Question 12

The more difficult it is to substitute one good for another, the more bowed inward indifference curves become.

Question 13

Indifference curves measure the consumer's willingness to trade one good for another good while maintaining a constant level of satisfaction.

Question 14

Suppose the price of a pizza is €8, the price of a milk shake is €2, and the consumer's weekly income is €32. Suppose we have constructed the consumer's budget line with pizzas on the vertical axis and milk shakes on the horizontal axis. Given this information, if the price of a milk shake doubles to €4, then what will happen to the budget line?

A) It will move so that it intersects the horizontal axis at 16 milk shakes per week.
B) Its slope rises to -1/2.
C) It will move so that it intersects the horizontal axis at 8 milk shakes per week.
D) It will shift inward but remain parallel to its original position.

Question 15

A family on a trip budgets €800 for restaurant meals and fast food. If the price of a fast food meal is €20 and if the family can afford 16 restaurant meals if they don't buy any fast food, how many fast food meals would the family gain if they gave up one restaurant meal?

A) 1
B) 0.4
C) 2
D) 2.5

Question 16

If the price of a good falls and the good is an inferior good, the income effect causes a decrease in the quantity demanded of that good.

Question 17

Budget constraints exist for consumers because

A) 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.

Question 18

An indifference curve is a curve that shows consumption bundles that give the consumer

A) increasing levels of satisfaction.
B) decreasing levels of satisfaction.
C) the same level of satisfaction.
D) perfect substitutes.

Question 19

The limit on the consumption bundles that a consumer can afford is known as

A) an indifference curve.
B) the budget constraint.
C) the marginal rate of substitution.
D) the consumption limit.

Question 20

If the price of a good falls, the substitution effect always causes an increase in the quantity demanded of that good.

Question 21

A change in the relative prices of which of the following pair of goods would likely cause the smallest substitution effect?

A) right shoes and left shoes
B) petrol from BP and petrol from Shell
C) Kit-Kat chocolate snacks and Twix chocolate snacks
D) Coke and Pepsi

Question 22

For dessert, Ingrid has the choice between cheesecake and apple pie. Ingrid would gain marginal utility of 50 from a piece of cheesecake, while the price of cheesecake is €5 per slice., Ingrid would gain marginal utility of 30 from a piece of apple pie, and the price of apple pie is €3 per slice. Given this information, Ingrid should buy

A) the cheesecake.
B) the apple pie.
C) two servings of the apple pie and no cheesecake.
D) either the apple pie or the cheesecake; it makes no difference to Ingrid at this point.

Question 23

Suppose a consumer must choose between the consumption of sandwiches and pizza. If we measure the quantity of pizza on the horizontal axis and the quantity of sandwiches on the vertical axis, and if the price of a pizza is €10 and the price of a sandwich is €5, then the slope of the budget constraint is

A) 2
B) 10
C) 1/2
D) 5

Question 24

If the substitution effect of a lowered price is partly or fully offset by the income effect, we know that the good in question is

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

Question 25

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 negative.
D) higher education will satisfy the law of demand.

Question 26

The change in consumption that results when a price change moves the consumer along a given indifference curve is known as the

A) income effect.
B) normal effect.
C) inferior effect.
D) substitution effect.

Question 27

The slope at any point on an indifference curve is known as the

A) marginal rate of indifference.
B) marginal rate of trade-off.
C) trade-off rate.
D) marginal rate of substitution.

Question 28

Claudia spends all of her income on warm-up suits and running shoes, and the price of a warm-up suit is four times as large as the price of a pair of shoes. Then, in order to maximize total utility, Claudia should

A) 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) divide her income equally between warm-up suits and running shoes.
D) buy both items until the marginal satisfaction of a warm-up suit is four times the marginal satisfaction of a pair of running shoes.

Question 29

Suppose Roberto always consumes two packets of sugar with his tea. Roberto's indifference curves for sugar and tea are

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

Question 30

The marginal rate of substitution between two goods equals the

A) 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) marginal cost of one times the marginal cost of the other.
D) price of one good divided by the price of the other.

Question 31

An individual's demand curve for a good is derived by

A) varying the income level and observing the resulting total utility derived from both goods.
B) varying the price of one good and observing the resulting quantities of the other good.
C) shifting the budget line to the left and calculating the loss in total utility.
D) varying the price of one good and observing the resulting quantities demanded of that good.

Question 32

Last week, the central bank took steps to lower the discount rate by one percentage point. This means that

A) the opportunity cost of current consumption has fallen.
B) the opportunity cost of future consumption has fallen.
C) the cost of borrowing has risen.
D) households will save more money to make up for lost interest earnings.

Question 33

Indifference curves tend to be bowed inward because of diminishing

A) marginal rates of substitution.
B) demand for the good as prices rise.
C) income.
D) supply of the good being consumed.

Question 34

Nathalie is maximizing total utility while consuming food and clothing. Her marginal utility from food and clothing is 50 and 25, respectively. If clothing is priced at €10 per unit, the price of food must

A) be rising.
B) be falling.
C) equal €10 as well.
D) equal €20.

Question 35

If the price of hamburgers increases, the substitution effect works to

A) 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.

Question 36

Indifference curves for perfect substitutes are

A) right angles.
B) bowed outward.
C) straight lines.
D) nonexistent.
E) bowed inward.

Question 37

If a good is a Giffen good, then

A) 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.

Question 38

Suppose that Annette gets an increase in her wage and she decides to work fewer hours. For her, the substitution effect of the wage change is

A) greater than the income effect.
B) less than the income effect.
C) exactly offset by the income effect.
D) zero.

Question 39

In the upward-sloping portion of the individual labour supply curve, the substitution effect is __________ the income effect.

A) greater than
B) less than
C) equal to
D) exactly offset by

Question 40

As more hours of Internet access are purchased, everything else remaining unchanged, marginal satisfaction from consuming additional hours will tend to

A) 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.

Question 41

Refer to Exhibit 4. Suppose that the consumer must choose between buying socks and belts. Also, suppose that the consumer's income is €100. Suppose that the price of a pair of socks falls from €5 to €2. The substitution effect is represented by the movement from point? ​ ​

A) Z to point X.
B) X to point Y.
C) X to point Z.
D) Y to point X.

Question 42

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

Question 43

If an increase in a consumer's income causes the consumer to decrease her quantity demanded of a good, then the good is

A) a substitute good.
B) a normal good.
C) a complementary good.
D) an inferior good.

Question 44

Refer to Exhibit 4. Suppose that the consumer must choose between buying socks and belts. Also, suppose that the consumer's income is €100. Suppose that the price of a pair of socks has falls from €5 to €2. The income effect is represented by the movement from point? ​ ​

A) Y to point X.
B) X to point Z.
C) X to point Y.
D) Z to point X.

Question 45

Explain the income and substitution effects.

Question 46

Mario consumes only cheese and crackers.
a) Could these both be inferior goods for Mario? Explain.
b) Suppose that cheese is a normal good for Mario while crackers is inferior. If the price of cheese falls explain what happens to Mario's consumption of both cheese and crackers.

Question 47

Why are many purchase decisions irrational?

Question 48

Why do people face tradeoffs?

Question 49

The change in consumption that results when a price change moves the consumer along a given indifference curve is known as the

A) inferior effect.
B) normal effect.
C) substitution effect.
D) complementary effect.
E) income effect.

Question 50

If an increase in a consumer's income causes the consumer to increase his quantity demanded of a good, then the good is

A) a complementary good.
B) an inferior good.
C) a normal good.
D) a substitute good.

Question 51

The consumer's optimal purchase of any two goods is the point where the

A) budget constraint crosses the indifference curve.
B) two highest indifference curves cross.
C) consumer reaches the highest indifference curve subject to remaining on the budget constraint.
D) consumer has reached the highest indifference curve.

Question 52

Which of the following is true about the consumer's optimum consumption bundle? At the optimum,

A) the slope of the indifference curve equals the slope of the budget constraint.
B) the indifference curve is tangent to the budget constraint.
C) the relative prices of the two goods equals the marginal rate of substitution.
D) none of these answers are true.
E) all answers a to c are true.

Question 53

Which of the following statements is not true with regard to the standard properties of indifference curves?

A) Indifference curves are downward sloping.
B) Indifference curves are bowed outward.
C) Indifference curves do not cross each other.
D) Higher indifference curves are preferred to lower ones.

Question 54

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

Question 55

What is the budget constraint?

Question 56

Refer to Exhibit 4. Suppose that the consumer must choose between buying socks and belts. Also, suppose that the consumer's income is €100. If the price of a belt is €10 and the price of a pair of socks is €5, the consumer will choose to buy the commodity bundle represented by point? ​ ​

A) Z
B) X
C) Y
D) the optimal point cannot be determined from this graph.

Question 57

Outline the four key properties of indifference curves.

Question 58

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

Question 59

Suppose we measure the quantity of good X on the horizontal axis and the quantity of good Y on the vertical axis. If indifference curves are bowed inward, as we move from having an abundance of good X to having an abundance of good Y, the marginal rate of substitution of good Y for good X (the slope of the indifference curve)

A) rises.
B) stays the same.
C) could rise or fall depending on the relative prices of the two goods.
D) falls.

Question 60

Which of the following is the best example of rational behaviour?

A) People are overconfident.
B) People carefully consider all options.
C) People are reluctant to change their mind.
D) People give weight to a small number of vivid observations.
E) People use rules of thumb or shortcuts in making decisions.

Question 61

Briefly explain heuristics using two examples.