Deck 22: The Theory of Consumer Choice

Question 1

The budget constraints shows the different possible combinations of goods that can be consumed at current prices and using all the consumer's income.

Answer 1

True

Question 2

If the budget constraint crosses an indifference curve in two places, both these points will be below the consumer's optimal level of consumption.

Answer 2

False

Question 3

An increase in income changes the slope of the budget constraint towards the cheaper good.

Answer 3

False

Question 4

The marginal rate of substitution is also known as the slope of the budget constraint.

Question 5

Economists define utility as a measure of satisfaction that a consumer receives from a bundle of goods.

Question 6

A consumer always prefers to be on a higher indifference curve to a lower indifference curve.

Question 7

When goods are not easy to substitute for each other, the indifference curves are less bowed, and when goods are easy to substitute, the indifference curves are very bowed.

Question 8

A consumer who chooses to consume at a point inside her budget constraint will have to borrow money to pay for her consumption.

Question 9

Bundles of goods on a consumer's indifference curve have the same total cost.

Question 10

Unless commodities are perfect complements or perfect substitutes, a price change will always result in an income effect.

Question 11

If a good is a perfect substitute, then the MRS will be constant no matter how much of any one good the consumer possesses.

Question 12

The slope of an indifference curve reflects the consumer's willingness to exchange one commodity for another.

Question 13

Indifference curves can be used to rank all possible bundles of commodities.

Question 14

When a consumer's consumption of one good is reduced, consumption of the other good must be reduced to keep the consumer equally happy due to opportunity costs.

Question 15

If two goods are perfect substitutes, their indifference curves will be right-angled; if two goods are perfect complements, their indifference curves will be linear.

Question 16

The indifference curve maps out the consumption bundles that give the consumer the same level of satisfaction.

Question 17

The rate at which a consumer is willing to trade one good for the other depends on the amounts of the goods he is already consuming.

Question 18

To reach a higher indifference curve a consumer must either obtain an income increase or be offered the goods at lower prices.

Question 19

When the price of a good rises, consumers are willing to pay for fewer units, so there is a decrease in demand.

Question 20

The slope of a budget constraint is equal to the relative prices of the two goods.

Question 21

Graph 22-1

Refer to Graph 22-1. Which of the points on the graph shown reflects the choice of a consumer who chooses not to spend her entire income?

A) A
B) B
C) C
D) D

Question 22

The substitution effect is the change in consumption that results when a price change moves the consumer along the same indifference curve.

Question 23

Indifference curves can:

A) cross, but only if one good is a Giffen good
B) cross, but only if one good is an inferior good
C) cross, but only if both goods are inferior goods
D) can never cross

Question 24

It is plausible for the labour supply curve to slope either upwards or downwards.

Question 25

Graph 22-1

Refer to Graph 22-1. A consumer who chooses to spend all of her income will be at point(s):

A) C
B) E
C) C or E
D) A, B or C

Question 26

When income increases, a budget constraint will:

A) shift inward, parallel to its initial position
B) shift outward, parallel to its initial position
C) pivot outward around the Y-axis
D) pivot outward around the X-axis

Question 27

With respect to the utility of the consumer, an in-kind transfer can be equivalent to a cash transfer.

Question 28

The theory of consumer choice provides the foundation for understanding:

A) the structure of production
B) the effect of advertising on brand preferences
C) product demand
D) the most efficient pricing strategy for firms

Question 29

For Giffen goods, the income effect dominates the substitution effect.

Question 30

The point at which the indifference curve is tangent to the budget constraint is called an optimum.

Question 31

If an in-kind transfer forces the recipient to consumer more of a good than he would on his own, then the recipient will always prefer a cash transfer.

Question 32

Amy buys sushi and miso for lunch. Her weekly budget for lunch is $48. If the price of sushi is $1.50 a piece and the price of miso is $1.20 a cup, then during the week Amy could choose to consume:

A) 48 sushi pieces and 20 cups of miso
B) 25 sushi pieces and 10 cups of miso
C) 20 sushi pieces and 15 cups of miso
D) 12 sushi pieces and 26 cups of miso

Question 33

The income effect is the change in consumption that results when a price change moves the consumer to a higher or lower indifference curve.

Question 34

If a consumer wants less of a good when his income rises, it is an inferior good.

Question 35

The substitution effect and income effect always reinforce each other.

Question 36

An increase in income will cause the budget constraint to shift outward and will allow the consumer to be able to choose between two possible optimum choices.

Question 37

A budget constraint:

A) represents the bundles of consumption that makes a consumer equally happy
B) shows the consumption bundles that a consumer can afford
C) reflects the desire by consumers to increase their income
D) shows the prices that a consumer chooses to pay for products he consumes

Question 38

A utility-maximising individual will consume a bundle of goods that is:

A) on the budget constraint
B) below the budget constraint
C) either on or below the budget constraint
D) above the budget constraint

Question 39

The theory of consumer choice has limited application to the work-leisure decision, as leisure time does not have a monetary value.

Question 40

As a general rule, the theory of consumer choice provides insight into the behaviour of:

A) individuals who make unconstrained choices
B) individuals who make constrained choices
C) individuals who are unaware of how to maximise their wellbeing
D) irrational consumers

Question 41

Graph 22-3

Refer to Graph 22-3. Using the figure in panel (a), if income is equal to $160, the price of good Y is:

A) $1.20
B) $3.20
C) $2.66
D) $8.00

Question 42

Graph 22-2

Refer to Graph 22-2. Which of the graphs shown reflects an increase in income?

A) A
B) B
C) C
D) D

Question 43

Graph 22-3

Refer to Graph 22-3. Using the figure in panel (a), what is ratio of the price of X to the price of Y (i.e. PX/PY)?

A) 50/1
B) 5/1
C) 1/5
D) 1/50

Question 44

As long as a consumer is on the same indifference curve:

A) her preferences will not affect the marginal rate of substitution
B) she is unable to decide which bundle of goods to choose
C) she is indifferent among the points on that indifference curve
D) she is indifferent to all points which lie on any other indifference curves

Question 45

The indifference curves of perfect substitutes are:

A) straight lines
B) at right angles
C) bowed inwards
D) bowed outwards

Question 46

Graph 22-4

Refer to Graph 22-4. Which of the following statements is true for a consumer who moves from point C to point D?

A) the consumer is indifferent between point C and point D
B) the consumer is likely to place a higher relative value on croissants at point C than at point D
C) it is difficult to compare the level of consumer satisfaction between points D and C
D) the consumer is definitely worse off

Question 47

Graph 22-4

Refer to Graph 22-4. Based on this graph, which of the following statements is correct?

A) point A is valued more than point B
B) point B is valued the same as point E
C) the bundle associated with point D contains more croissants than that associated with point
D) the bundles along indifference curve I₁ are preferred to those along indifference curve I₂

Question 48

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

A) different for each bundle along the indifference curve
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) not likely to reflect relative value of goods

Question 49

The amount of a good that an individual has:

A) is only affected by prices
B) affects the rate at which she is willing to trade
C) is only affected by income
D) will not affect the marginal rate of substitution

Question 50

Graph 22-3

Refer to Graph 22-3. If the budget constraint is $160 then from the panel (b) we can determine that the:

A) price of X is $40 and the price of Y is $10
B) price of Y is $40 and the price of X is $10
C) price of X is $4 and the price of Y is $16
D) price of Y is $4 and the price of X is $16

Question 51

Graph 22-3

Refer to Graph 22-3. Using the figure in panel (b), what is ratio of the Price of Y to the price of X (i.e. PX/PY)?

A) 4/1
B) 1/1
C) 1/4
D) 1/16

Question 52

Suppose at the current consumption bundle, the marginal rate of substitution of pizza for pepsi is 4 litres of pepsi for every one pizza. If we took four litres of pepsi away from our consumer and gave them one extra pizza, which of the following statements would be correct?

A) the consumer would be on a higher indifference curve
B) the consumer would be on a lower indifference curve
C) the consumer's marginal rate of substitution of pepsi for pizza would rise
D) the consumer's marginal rate of substitution of pepsi for pizza would fall

Question 53

Graph 22-2

Refer to Graph 22-2. Which of the graphs shown reflects a decrease in the price of good X only?

A) A
B) B
C) C
D) D

Question 54

Graph 22-2

Refer to Graph 22-2. Which of the graphs shown reflects an increase in the price of good Y?

A) A
B) B
C) C
D) D

Question 55

Indifference curves provide a way to graphically represent:

A) the constraints faced by individuals
B) an individual's preferences
C) the relative price of commodities
D) an income level sufficient to make an individual happy

Question 56

Graph 22-4

Refer to Graph 22-4. Which of the following statements is true?

A) since point E and point B have basically equal units of coffee and croissants a consumer would be indifferent between these two points
B) if a consumer moves from point C to point A, her loss of croissants cannot be compensated for by an increase of coffee
C) point E is preferred to all other points identified in the figure
D) since more is preferred to less, point C may be preferred to point E in some circumstances

Question 57

Graph 22-4

Refer to Graph 22-4. A person who chooses to consume bundle C rather than bundle A is likely to:

A) place a higher relative value on croissants than on coffee
B) place a higher relative value on coffee than on croissants
C) gain more satisfaction from bundle C than bundle A
D) gain more satisfaction from bundle B than bundle A

Question 58

The indifference curves of perfect compliments are:

A) straight lines
B) at right angles
C) bowed inwards
D) bowed outwards

Question 59

Graph 22-1

Refer to Graph 22-1. All of the points identified on the graph shown represent possible consumption options with the exception of:

A) none
B) C
C) D
D) E

Question 60

If the consumption of one good is increased, how must a consumer alter his consumption of another good in order to remain indifferent between two bundles?

A) he must reduce his consumption of another good
B) he must increase his consumption of another good
C) he must not change his consumption of another good
D) he can reduce, increase or not change his consumption of another good

Question 61

The optimum represents the:

A) centre point on the highest indifference curve possible for the consumer
B) best combination of two goods that is attainable by the consumer
C) point at which an indifference curve crosses the consumer's budget constraint
D) intersection of the consumer's demand curve and the market supply curve

Question 62

Graph 22-5

Refer to Graph 22-5. If a consumer is at point D they could:

A) increase their consumption of X and increase their consumption of Y and be better off
B) increase their consumption of X and reduce their consumption of Y and be better off
C) reduce their consumption of X and increase their consumption of Y and be better off
D) reduce their consumption of X and reduce their consumption of Y and be better off

Question 63

At the optimum:

A) the slope of the indifference curve is equal to the slope of the budget constraint
B) it is still possible for the consumer to increase his consumption of both goods
C) the indifference curve would intersect the budget constraint at its centre
D) the budget constraint would have a slope of 1

Question 64

An optimising consumer will select a consumption bundle in which utility is maximised:

A) and prices are minimised
B) and income is maximised
C) and indifference curves are linear
D) subject to constraints imposed by her budget

Question 65

When two goods are perfect substitutes they will have:

A) indifference curves with a positive slope
B) indifference curves that cross
C) linear indifference curves
D) indifference curves that are right angles

Question 66

The combination of two goods a consumer chooses depends on his:

A) demand and his supply
B) preferences and his demand
C) budget constraint and his preferences
D) budget constraint and his supply

Question 67

An optimising consumer will select a consumption bundle in which the:

A) marginal rate of substitution is equal to income
B) marginal rate of substitution is equal to the relative price
C) ratio of expenditure shares equals the marginal rate of substitution
D) utility exceeds price

Question 68

If the marginal rate of substitution of pepsi for pizza is six litres of pepsi for one pizza slice, and the price of pepsi is $1 per litre and the price of pizza is $3 per slice, then this consumer should:

A) trade pepsi for pizza and end up on a higher indifference curve
B) trade pizza for pepsi and end up on a higher indifference curve
C) do nothing as they are already maximizing utility
D) we cannot say without more information

Question 69

Graph 22-5

Refer to Graph 22-5. In the figure shown, an optimising consumer is most likely to select the consumption bundle associated with:

A) point A
B) point B
C) point C
D) point E

Question 70

Which of the following is a property of indifference curves?

A) indifference curves have positive slopes
B) indifference curves that cross are helpful in explaining differences in consumption choices
C) indifference curves are usually bowed in toward the origin
D) indifference curves are always linear and downward-sloping

Question 71

A consumer's set of indifference curves provides a:

A) complete ranking of all possible consumption bundles
B) ranking of the set of bundles that happen to fall on indifference curves
C) framework for evaluating market equilibriums
D) relative ranking of bundles that provide more of all goods

Question 72

When economists describe preferences, they sometimes use the concept of:

A) income
B) prices
C) markets
D) utility

Question 73

A consumer:

A) prefers higher indifference curves to lower indifference curves
B) is equally satisfied with any indifference curve
C) is generally unable to place all consumption bundles on an indifference curve
D) prefers indifference curves with positive slopes

Question 74

If demand for a good falls as income rises, this is known as a:

A) normal good
B) inferior good
C) Giffen good
D) the law of demand

Question 75

When two goods are perfect substitutes, the marginal rate of substitution:

A) increases as the abundance of one good increases
B) increases as the scarcity of one good increases
C) decreases as the scarcity of one good increases
D) is constant

Question 76

A bowed shaped indifference curve reflects a consumer's:

A) greater willingness to give up a good that she has an abundance of
B) lower willingness to give up a good that she has an abundance of
C) desire to specialise in the consumption of one good over another
D) unwillingness to substitute one good for another

Question 77

When indifference curves are bowed inward toward the origin:

A) people are less inclined to trade away goods that they have an abundance of
B) people can only increase satisfaction by consuming more of all commodities
C) it is unlikely that consumers will be willing to engage in trade
D) the marginal rate of substitution decreases as a consumer moves down an indifference curve

Question 78

Graph 22-5

Refer to Graph 22-5. It will be possible for the consumer to reach I₂ if:

A) the price of Y decreases
B) the price of X decreases
C) income increases
D) all of the above are correct

Question 79

A plausible example of a perfect substitute is:

A) left and right shoes
B) coke and pepsi cola
C) cars and bicycles
D) apples and chicken

Question 80

American hotdogs are made by combining one bun with one sausage. American hotdog buns and sausages are a good example of:

A) positively sloped indifference curves
B) perfect substitutes
C) crossing indifference curves
D) perfect complements